<PAGE> 1
Provident Institutional Funds, Inc.
SHORT DURATION FUND
INTERMEDIATE DURATION FUND
<TABLE>
<S> <C>
Bellevue Park Corporate Center For purchase and redemption orders call:
400 Bellevue Parkway (800) 441-7450 (in Delaware: (302) 791-5350).
Wilmington, Delaware 19809 For other information call: (800) 821-7432.
</TABLE>
Provident Institutional Funds, Inc. (the "Company") is an open-end
management investment company the shares of which can be offered in separate
diversified and non-diversified series. The Company's shares are currently
offered in two diversified series: Short Duration Fund and Intermediate Duration
Fund (each, a "Fund" and, together, the "Funds"). The Funds' shares are no load;
that is, they are not subject to any sales charges or redemption fees.
The investment objective of each Fund is to seek as high a level of current
income as is consistent with preservation of principal and the average weighted
duration of its respective portfolio securities. Each Fund seeks to achieve its
objective by investing in U.S. Treasury bills, notes and bonds and other
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements fully secured by such obligations.
Short Duration Fund expects to maintain an average weighted portfolio duration
ranging from 18 months to three years, and Intermediate Duration Fund expects to
maintain an average weighted portfolio duration ranging from four to six years.
See "Investment Objectives and Policies--Duration." The Funds are designed to
qualify for investment by national banks.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED,
ENDORSED, OR OTHERWISE SUPPORTED BY PNC BANK CORP. OR ITS AFFILIATES
OR THE U.S. GOVERNMENT, AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY. INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus concisely describes the information about the Funds that
you should know before investing. Please read the Prospectus carefully before
investing and retain it for future reference. Additional Information about the
Funds, contained in a Statement of Additional Information currently dated April
28, 1995, has been filed with the Securities and Exchange Commission and is
available to investors without charge by calling 800-821-7432. The Statement of
Additional Information, as amended from time to time, is incorporated in its
entirety by reference into this Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
April 28, 1995
<PAGE> 2
INTRODUCTION
Provident Institutional Funds, Inc. (the "Company") is an open-end
management investment company, or mutual fund, organized under the laws of the
State of Maryland. The Company's common stock may be issued in separate
diversified and non-diversified series. The Company's shares are currently
offered in two diversified series: Short Duration Fund and Intermediate Duration
Fund (each a "Fund" and, collectively, the "Funds"). The Funds are designed to
qualify for investment by national banks.
THE INVESTMENT ADVISER
PNC Institutional Management Corporation (the "Adviser"), an indirect
wholly-owned subsidiary of PNC Bank, National Association ("PNC Bank"), provides
or oversees the provision of all investment advisory services for the Funds.
Each Fund pays the Adviser a fee for such advisory services. Advisory fees for
each Fund are payable at the annual rate of .40% of each Fund's average daily
net assets. The Adviser has agreed to limit advisory fees to .30% of each Fund's
average daily net assets until at least December 31, 1995. See
"Management--Investment Adviser" and "Management--Investment Subadviser."
THE INVESTMENT SUBADVISER
Each Fund's assets are managed on a day-to-day basis by a subadviser,
BlackRock Financial Management, Inc. (the "Subadviser"), a wholly-owned
subsidiary of PNC Asset Management Group, Inc., which is a wholly-owned
subsidiary of PNC Bank. The Subadviser is responsible for individual portfolio
securities selection for the Funds. No subadvisory fees are paid by the Funds to
the Subadviser; however, the Subadviser will receive compensation from the
Adviser. See "Management--Investment Subadviser."
THE ADMINISTRATOR, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Funds are administered by PFPC Inc. ("PFPC"), an indirect wholly-owned
subsidiary of PNC Bank Corp. Each Fund pays PFPC a fee for various
administrative services performed by PFPC for the Fund such as maintenance of
books and records, preparation of government filings and shareholder reports and
computation of net asset values and daily dividends. The administration fees for
each Fund are paid at the annual rate of .15% of each Fund's average daily net
assets. PFPC also serves as the Funds' transfer agent, dividend disbursing agent
and registrar. See "Management--Administrator" and "--Transfer Agent, Dividend
Disbursing Agent and Custodian."
PURCHASE AND REDEMPTION OF SHARES
Provident Distributors, Inc. (the "Distributor") acts as the principal
distributor of the Funds' shares. A Fund's shares may be purchased directly from
the Fund by contacting PFPC at (800) 441-7450. Shares of each Fund are offered
to the public for purchase and redemption at their respective net asset values
per share next determined after receipt of an order in proper form by PFPC,
without imposition of any sales or redemption charge. See "Purchase of Shares"
and "Redemption of Shares." Each Fund reserves the right, upon 30 days' written
notice, to redeem an account if the net asset value of the shares in that
account falls below $500. See "Redemption of Shares--Involuntary Redemption."
2
<PAGE> 3
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment in each Fund is $5,000. There is no minimum
subsequent investment. Each Fund reserves the right to accept smaller purchases
in its sole discretion. See "Purchase of Shares--Minimum Investments."
EXCHANGES
Shareholders of either Fund are entitled to exchange their Fund shares for
shares of the other Fund on the basis of each Fund's respective net asset value
at the time of the exchange. See "Purchase of Shares--Exchange Privilege."
RISK FACTORS TO CONSIDER
An investment in either of the Funds is subject to certain risks, as set
forth in detail under "Risk Considerations." As with other mutual funds, there
can be no assurance that either Fund will achieve its objective. To the extent
set forth under "Investment Objectives and Policies" and "Special Investment
Methods," the Funds may engage in the following investment practices which may
involve added risks: the purchase of mortgage-related securities, the use of
repurchase agreements and reverse repurchase agreements and dollar rolls (the
use of reverse repurchase agreements and dollar rolls involves the speculative
technique known as leveraging) and the purchase or sale of securities on a
"when-issued" or "forward commitment" basis. All of these transactions involve
certain special risks, as set forth under the "Investment Objectives and
Policies," "Special Investment Methods" and "Risk Considerations" sections found
on pages 6, 10 and 13, respectively.
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to PFPC at (800) 441-7450 (in Delaware (302) 791-5350). General
inquiries regarding the Funds should be directed to the Funds at (800) 821-7432.
3
<PAGE> 4
FEES AND EXPENSES
The expense information set forth below has been restated to reflect
current fees through the end of each Fund's fiscal year ending December 31,
1995, on an annualized basis. As a result of a change in certain service
providers after February 16, 1995, an expense structure different from that
which is set forth below applied.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
DURATION DURATION
FUND FUND
------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases........................ None None
Maximum Sales Load Imposed on Reinvested Dividends............. None None
Deferred Sales Charges......................................... None None
Redemption Fees................................................ None None
Exchange Fees.................................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After waiver)................................. .30% .30%
12b-1 Fees (shareholder service fees).......................... .10% .10%
Other Expenses............................................... .25% .25%
Administration Fees....................................... .15% .15%
Miscellaneous............................................. .10% .10%
----- ----- ----- -----
Total Fund Operating Expenses (After waiver)................... .65% .65%
==== ====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
DURATION DURATION
FUND FUND
-------- ------------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
1 year $ 7 $ 7
3 years $ 21 $ 21
5 years $ 36 $ 36
10 years $ 81 $ 81
</TABLE>
The purpose of the above Fees and Expenses table is to assist the investor
in understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. The expense information in the table above has been
restated to reflect current fees. THE EXAMPLE SHOWN ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The percentages set forth for
each Fund which are included within the category "Other Expenses" are based on
estimated amounts through the end of each Fund's fiscal year ending December 31,
1995, on an annualized basis. The Adviser has agreed to waive a portion of the
management fee so that the management fee will be payable at the annual rate of
.30% of each Fund's average daily net assets through at least December 31, 1995.
Management fees and total operating expenses absent such waiver would be .40%
and .75%, respectively, of each Fund's average daily net assets on an annualized
4
<PAGE> 5
basis. For additional information, including a more complete explanation of
management, administration and service fees, see "Management--Investment
Adviser," "--Administrator," "--Shareholder Service Plan" and "--Expenses." The
foregoing table has not been audited by the Fund's independent auditors.
FINANCIAL HIGHLIGHTS
The financial highlights presented below have been audited by KPMG Peat
Marwick LLP, the Company's independent auditors, whose report is contained in
the Company's Annual Report to Shareholders dated December 31, 1994. Such
financial highlights should be read in conjunction with the Funds' financial
statements contained in the Statement of Additional Information. More
information about the performance of the Funds is also contained in the Annual
Report to Shareholders, which may be obtained without charge by calling
800-821-7432.
(For a Share Outstanding Throughout the Period)(1)
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
DURATION DURATION
------------------ ------------------
PER SHARE DATA
FEBRUARY 14, 1994 FEBRUARY 14, 1994
THROUGH THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1994
------------------ ------------------
<S> <C> <C>
Net asset value, beginning of period...................... $ 10.00 $ 10.00
------------------ ----------
Operations:
Investment income--net............................... .42 .46
Net realized and unrealized losses on investments.... (.53) (.83)
------------------ ----------
Total from operations........................... (.11) (.37)
------------------ ----------
Distributions to shareholders:
From investment income--net.......................... (.42) (.46)
------------------ ----------
Net asset value, end of period............................ $ 9.47 $ 9.17
=============== ===============
Total return(2)............................................. (1.11)% (3.64)%
Ratios/Supplemental Data
Net assets at end of period $(000)................... 101,904 35,390
Ratio of total expenses to average net assets(3),(4)..... .50% .55%
Ratio of net investment income to average net
assets(3)............................................ 4.96% 5.68%
Portfolio turnover rate (excluding short-term
securities)........................................ 90.60% 50.50%
</TABLE>
- ---------------
(1) Commencement of operations was February 14, 1994.
(2) Based on the change in net asset value of a common share during the period.
Assumes reinvestment of distributions at net asset value.
(3) Adjusted to an annual basis.
(4) Without the voluntary waiver of expenses, the annualized ratios of
expenses to average net assets would have been 1.03% and 1.23% for Short
Duration Fund and Intermediate Duration Fund, respectively, for the period
ended December 31, 1994. During the period ended June 30, 1994, the advisory
fees were payable at the rate of .60% of the average daily net assets of
each Fund, all of which was waived.
5
<PAGE> 6
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company is an open-end management investment company the shares of
which can be offered in separate diversified and non-diversified series. The
investment objective of each Fund is to seek as high a level of current income
as is consistent with preservation of principal and the average weighted
duration of its respective portfolio securities. Short Duration Fund expects to
maintain an average weighted portfolio duration ranging from 18 months to three
years, and Intermediate Duration Fund expects to maintain an average weighted
portfolio duration ranging from four to six years. Duration is an indicator of a
security's price "volatility" or "risk" associated with changes in interest
rates. See "Duration."
Each Fund's investment objective may not be changed without the approval of
its shareholders. In view of the risks inherent in all investments in
securities, there is no assurance that either Fund's investment objective will
be achieved. The investment policies and techniques employed in pursuit of the
Funds' objectives may be changed without shareholder approval, unless otherwise
noted.
INVESTMENT POLICIES AND TECHNIQUES
Each Fund seeks to achieve its objective by investing solely in U.S.
Treasury bills, notes and bonds and other securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities") and repurchase agreements fully secured by U.S. Government
Securities. The U.S. Government Securities in which either Fund may invest
include zero-coupon Treasury securities and fixed or adjustable rate
mortgage-related securities such as pass-through securities and collateralized
mortgage obligations, all of which are described below. Either Fund may purchase
or sell securities on a when-issued or forward commitment basis and may use the
other techniques described in the Prospectus.
U.S. Government Securities are backed in a variety of ways by the U.S.
Government or its agencies or instrumentalities. Some of these obligations, such
as mortgage-backed securities issued by the Government National Mortgage
Association, are backed by the full faith and credit of the U.S. Treasury.
Others, such as those issued by the Federal Home Loan Bank, are backed by the
right of the issuer to borrow from the U.S. Treasury. Still others, such as
those issued by the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality. Finally, obligations of other agencies or
instrumentalities, such as the Student Loan Marketing Association, are only
backed by the credit of the agency or instrumentality issuing the obligations.
The U.S. Government does not guarantee the value or yield of the
mortgage-related securities themselves or the net asset value of the shares of
the Funds.
Each Fund will invest in U.S. Government Securities that are deemed to be
"Type I Securities" by the Office of the Comptroller of the Currency (the "OCC")
under 12 C.F.R. 1.3 ("Type I Securities"), repurchase agreements fully secured
by Type I Securities and, with respect to no more than 10% of its total assets,
open-end investment companies that invest solely in Type I Securities and
repurchase agreements fully secured by Type I Securities. Type I Securities are
those securities which a national bank supervised by the OCC may deal in,
underwrite, purchase and sell for its own account without limitation as to
percentage of its assets.
6
<PAGE> 7
The Funds invest only in securities in which national banks supervised by
the OCC may invest under applicable Federal law and the regulations and
supervisory policies of the OCC. However, each Fund will invest no more than 20%
of its total assets in mortgage-related or certain other securities such as
zero-coupon Treasury securities that are permissible for national banks but are
considered "high risk" under applicable OCC supervisory policies.
Notwithstanding the foregoing, neither Fund will invest any of its assets in the
following high risk securities: interest-only securities, principal-only
securities and inverse floating securities. Each Fund will comply with
applicable OCC supervisory policies which include policies on price volatility.
See the Statement of Additional Information for a description of applicable OCC
supervisory policies.
DURATION
Traditionally, a debt security's "term to maturity" has been used to
represent the sensitivity of the debt security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides its final payment, taking no account of the pattern of the security's
payments prior to maturity. Most debt securities provide interest ("coupon")
payments in addition to a final ("par") payment at maturity, although
mortgage-related securities return principal payments over the life of the
security. Some debt securities also have call provisions allowing the issuer to
repay the instrument in full before the stated maturity date. Depending on the
relative magnitude of these payments, the market values of debt securities
respond differently to changes in the level and structure of interest rates.
Duration is a measure of the expected change in value of a fixed income
security for a given change in interest rates that was developed as a more
precise alternative to the concept of "term to maturity." For example, if
interest rates changed by one percent, the value of a security having an
effective duration of two generally would vary by two percent. Duration takes
the length of the time intervals between the present time and the time that the
interest and principal payments are scheduled, or in the case of a callable
bond, expected to be received, and weighs them by the present values of the cash
to be received at each future point in time.
In some situations even the standard duration calculation does not properly
reflect the interest rate risk of a security. For example, floating and variable
rate debt securities often have final maturities of 10 or more years; however,
their interest rate risk corresponds to the frequency of the coupon reset.
Another example for which the interest rate risk is not properly captured by
duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining such securities' interest rate risk. In these
and other similar situations, the Adviser or Subadviser will use more
sophisticated analytical techniques, such as modeling monthly principal and
interest payments based upon historical experience or comparing the mortgage
rates underlying the security to prevailing market rates, to arrive at an
"effective duration" that incorporates the economic life of a security into the
determination of its interest rate risk. These techniques may involve the
Adviser's or Subadviser's estimates of future economic parameters which may vary
from actual future values. The duration is determined by the Subadviser.
MORTGAGE-RELATED SECURITIES
A mortgage-related security is an interest in a pool of mortgage loans.
Most mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a
7
<PAGE> 8
pro rata share of both principal and interest (less servicing and other fees),
as well as unscheduled prepayments, as mortgages in the underlying mortgages
pool are paid off by the borrowers. The current issuers or guarantors of
mortgage-related securities in which the Funds may invest are the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA creates pass-through securities from pools of government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks, and savings associations. FNMA
and FHLMC issue pass-through securities from pools of conventional and federally
insured and/or guaranteed residential mortgages obtained from various entities,
including savings associations, savings banks, commercial banks, credit unions
and mortgage bankers.
The timely payment of principal and interest on GNMA pass-through
securities are guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. FNMA guarantees full and timely payment of all interest and
principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal, of its pass-through securities. Securities from FNMA
and FHLMC are not backed by the full faith and credit of the United States;
however, they are generally considered to offer minimal credit risks. The yields
provided by these mortgage-related securities historically have exceeded the
yields on other types of U.S. Government Securities with comparable maturities
in large measure due to the risks associated with prepayment. See "Risk
Considerations." The U.S. Government does not guarantee the value or yield of
the mortgage-related securities themselves or the net asset value of Fund
shares.
Adjustable rate mortgage securities ("ARMS") are a form of pass-through
security representing interests in pools of mortgage loans whose interest rates
are adjusted from time to time. The adjustments usually are determined in
accordance with a predetermined interest rate index and may be subject to
certain limits. While the values of ARMS, like other debt securities, generally
vary inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods of
increasing interest rates), the values of ARMS should generally be more
resistant to price swings than other debt securities because the interest rates
of ARMS move in relation to market interest rates. The adjustable rate feature
of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates. Also,
since many adjustable rate mortgages only reset on an annual basis, it can be
expected that the prices of ARMS will fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable rate mortgages.
The Funds may invest in collateralized mortgage obligations and multi-class
pass-through securities (collectively, "CMOs" unless the context otherwise
indicates) issued or backed by the U.S. Government or its agencies and
instrumentalities. CMOs are debt instruments collateralized by pools of mortgage
loans or GNMA, FNMA or FHLMC certificates ("Mortgage Assets"). Issuers of CMOs
frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). In a CMO, a series of bonds or
certificates is issued in multiple classes or "tranches." Each class of a CMO is
issued at a specific fixed or floating coupon rate and has a stated maturity or
final distribution date. Principal prepayments on the Mortgage Assets may cause
the various classes of a CMO to be retired substantially earlier than their
stated maturities or final distribution dates. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO in a
number of different ways. Certain classes of CMOs may
8
<PAGE> 9
have priority over others with respect to the receipt of payments and
prepayments on the mortgages. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to some of the individual tranches than exists with the underlying
collateral of the CMO. As a general rule, the more predictable the cash flow is
on a CMO tranche, the lower the anticipated yield will be on that tranche at the
time of issuance relative to prevailing market yields on mortgage-related
securities. As part of the process of creating more predictable cash flows on
most of the tranches of CMOs, one or more tranches generally must be created
that absorb most of the volatility in the cash flows on the underlying mortgage
loans. The yields on these tranches are generally higher than prevailing market
yields on mortgage-backed securities with similar maturities. As a result of the
uncertainty of the cash flows on these tranches, the market prices of and yield
on these tranches generally are more volatile. The Adviser (or Subadviser) will
allocate the Funds' investments among different types of tranches based on its
estimate of the relative value and duration of securities, which may take into
account interest rate movements, market conditions and prepayment assumptions.
Neither Fund will invest in CMO residual interests (i.e., claims on any excess
cash flows remaining after payments due to all other CMO classes and
administrative expenses have been met).
Neither Fund will invest more than 20% of its total assets in
mortgage-related or certain other securities such as zero coupon Treasury
securities that are considered "high risk" under applicable OCC supervisory
policies. However, neither Fund will invest in the following high risk
securities: interest-only securities, principal-only securities and inverse
floating securities. See the Statement of Additional Information for a more
complete description of securities deemed to be "high risk mortgage securities"
under applicable OCC supervisory policies.
ZERO COUPON TREASURY SECURITIES
The Funds may invest in "zero coupon" Treasury securities. A zero coupon
security pays no interest to its holder during its life. The Funds will invest
only in zero coupon Treasury securities which are direct obligations of the U.S.
Government and will not invest in any such securities that are "privately
issued" (i.e., sold by a bank or brokerage firm which itself separates the
principal portions from the coupon portions of the U.S. Treasury bonds and notes
and holds such instruments in a custodial or trust account).
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, those securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. In certain circumstances such as a marked increase in interest rates,
a Fund could fail to recoup its initial investment in those securities,
particularly if it were required to sell the securities prior to maturity.
Current Federal tax law requires that a holder of a zero coupon security accrue
a portion of the discount at which the security was purchased as income each
year even though such Fund receives no interest payment in cash on the security
during the year. In addition, as a registered investment company, a Fund will be
required to distribute this income to shareholders. See "Dividends,
Distributions and Tax Status." These distributions will be made from the Fund's
cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A Fund will not be able to purchase additional income producing
securities with cash used to make such distributions, and the Fund's current
income ultimately may be reduced as a result.
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<PAGE> 10
SPECIAL INVESTMENT METHODS
The Funds will engage in the following investment practices only to the
extent to which national banks may engage in such practices under applicable
Federal laws and the regulations and supervisory policies of the OCC.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), if a seller were to default on its
repurchase obligation, a Fund would suffer a loss to the extent proceeds from
the sale of collateral were less than the repurchase price. In the event of a
seller's bankruptcy, a Fund might be delayed in, or prevented from, selling the
collateral to the Fund's benefit. The Board of Directors has established
procedures, which are periodically reviewed by the Board, pursuant to which the
Adviser or Subadviser will monitor the creditworthiness of the banks and dealers
with which the Fund enters into repurchase agreement transactions. Repurchase
agreements are considered to be loans by the Funds under the Investment Company
Act of 1940, as amended (the "1940 Act"). Repurchase agreements maturing in more
than seven days are considered illiquid and subject to each Fund's restriction
on investing in illiquid securities. See "Illiquid Securities" below.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may engage in reverse repurchase agreements with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price.
Reverse repurchase agreements may be used as a means of borrowing for investment
purposes. This speculative technique is referred to as leveraging. Leveraging
may exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Also, use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transactions costs.
Each Fund may also enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. Dollar rolls may be used as a
means of borrowing for investment purposes.
Each Fund will establish a segregated account with the custodian in which
it will maintain cash or U.S. Government securities at least equal in value to
its obligations in respect to reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve
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<PAGE> 11
the risk that the market value of the securities a Fund is required to purchase
may decline below the agreed upon repurchase price of those securities. In
addition, in the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted and a Fund's exposure to changes in
market value may increase or decrease pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
Reverse repurchase agreements and dollar rolls may involve the speculative
technique known as leveraging and are considered borrowings by the Funds for
purposes of the percentage limitation applicable to borrowings.
BORROWING
Each of the Funds may borrow money from banks for temporary or emergency
purposes in an amount up to one-third of the value of its total assets in order
to meet redemption requests without immediately selling any of its portfolio
securities. If, for any reason, the current value of either Fund's total assets
falls below an amount equal to three times the amount of its indebtedness from
money borrowed, such Fund will, within three days, reduce its indebtedness to
the extent necessary. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so. Interest paid by
a Fund on borrowed funds would decrease the net earnings of that Fund. Neither
of the Funds will purchase portfolio securities while outstanding borrowings
exceed 5% of the value of the Fund's total assets. Each Fund may mortgage,
pledge or hypothecate its assets to secure permitted temporary or emergency
borrowing. The policies set forth in this paragraph are fundamental and may not
be changed with respect to a Fund without the approval of a majority of that
Fund's shares. Reverse repurchase agreements and dollar rolls are considered
borrowings by the Funds for purposes of the percentage limitation applicable to
borrowings.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Either Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. If the Fund chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
can incur a gain or loss. The use of when-issued transactions and forward
commitments enables the Fund to hedge against anticipated changes in interest
rates and prices. The Fund also enters into such transactions to generate
income. In such instances, the Fund agrees to resell its purchase commitment to
a third-party seller at the current market price on the date of sale and
concurrently enters into another purchase commitment for such securities at a
later date. In connection with its ability to purchase securities on a
when-issued or forward commitment basis, each Fund may enter into mortgage
"dollar rolls" in which the Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity) but not identical securities on a
specified future date. As an
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inducement for a Fund to "roll over" its purchase commitment, the Fund receives
a negotiated fee.
SHORT SALES AGAINST-THE-BOX
The Funds may make short sales "against-the-box" for the purpose of
deferring realization of gain or loss for Federal income tax purposes and for
the purpose of hedging against an anticipated decline in the value of the
underlying securities. A short sale "against-the-box" is a short sale in which
the Fund owns or has the right to obtain without payment of additional
consideration an equal amount of the same type of securities sold short. If a
Fund engages in a short sale, the collateral for the short position will be
maintained by the Fund's custodian. While the short sale is open, the Fund will
maintain in a segregated account an amount of securities equal in kind and
amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities.
ILLIQUID SECURITIES
Either Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities may offer a higher yield than securities which are more
readily marketable, but they may not always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time when the Adviser or Subadviser deems it advisable to do so. In addition, in
order to meet redemption requests, a Fund may have to sell other assets, rather
than such illiquid securities, at a time which is not advantageous.
The Fund will treat certain securities that might otherwise be deemed to be
illiquid as liquid when they have been determined to be liquid by the Adviser
(or Subadviser), subject to the oversight of and pursuant to guidelines adopted
by the Board of Directors. Any such securities which are not so determined to be
liquid will be subject to the Fund's 15% limitation on investments in illiquid
securities. See "Investment Objectives, Policies and Restrictions--Illiquid
Securities" in the Statement of Additional Information.
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES
The investment objective and fundamental policies of each Fund may not be
changed without approval of the holders of a majority of that Fund's outstanding
voting securities. As used in this Prospectus, a majority of a Fund's
outstanding voting securities means the lesser of (a) 67% of the shares of the
Fund present or represented at a shareholders' meeting at which the holders of
more than 50% of the shares are present or represented or (b) more than 50% of
the outstanding shares of the Fund. Unless otherwise noted, policies of the
Funds are not deemed to be fundamental. Investment policies that are not
identified as fundamental may be changed by the Board of Directors without
shareholder approval.
INVESTMENT RESTRICTIONS
Each of the Funds has adopted certain investment restrictions, which are
set forth in detail in the Statement of Additional Information. Certain of these
restrictions are fundamental and may not be changed without shareholder
approval.
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Except with respect to each Fund's policy concerning borrowing, if a
percentage restriction set forth under "Investment Objectives and Policies" is
adhered to at the time of an investment, a later increase or decrease in
percentage resulting from changes in values of assets will not constitute a
violation of such restriction.
PORTFOLIO TURNOVER
Each Fund will use short-term trading to benefit from yield disparities
among different issues of securities or otherwise to achieve its investment
objective. The portfolio turnover rate for each Fund is not expected to exceed
400%. Portfolio turnover in excess of 100% is generally considered to be high.
Higher portfolio turnover involves correspondingly greater brokerage commissions
and other transaction costs, which are borne directly by the Fund, and may
increase short-term capital gains which are taxable as ordinary income when
distributed to shareholders. See "Financial Highlights" and "Taxes." The method
of calculating the portfolio turnover rate is set forth in the Statement of
Additional Information under "Investment Objectives, Policies and
Restrictions--Portfolio Turnover."
RISK CONSIDERATIONS
Market prices of the securities in which the Funds invest (and thus the net
asset values of the Funds' shares) will fluctuate and will tend to vary
inversely with the changes in prevailing interest rates. If interest rates
increase from the time a security is purchased, such security, if sold, might be
sold at a price less than its purchase cost. Conversely, if interest rates
decline from the time a security is purchased, such security, if sold, might be
sold at a price greater than its purchase cost.
Prepayments of principal by mortgagors or mortgage foreclosures will affect
the average life of the mortgage-related securities in a Fund's portfolio.
Mortgage prepayments are affected by the level of interest rates and by factors
including general economic conditions, the underlying location and age of the
mortgage and other social and demographic conditions. In periods of rising
interest rates, the rate of prepayments tends to decrease, thereby lengthening
the average life of a pool of mortgage-related securities. Conversely, in
periods of falling interest rates the rate of prepayments tends to increase,
thereby shortening the average life of a pool. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting the yield of the Fund. Because prepayments of principal generally
occur when interest rates are declining, it is likely that the Fund will have to
reinvest the proceeds of prepayments at lower interest rates than those at which
the assets were previously invested. If this occurs, the Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates than
other fixed income securities of comparable duration, although these securities
have a comparable risk of decline in market value in periods of rising interest
rates.
To the extent that mortgage-related securities are purchased at a premium
by a Fund, unscheduled prepayments may result in some loss of the Fund's
principal investment to the extent of the premium paid. On the other hand, if
mortgage-related securities are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal will increase
current and total returns.
Duration is one of the fundamental tools used by the Subadviser in managing
interest rate risks, including prepayment risks. For further discussion of
duration, see "Investment Objectives and Policies--Duration" on page 7.
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Certain derivative securities in which the Funds may invest, such as zero
coupon Treasury securities, may exhibit considerably more price volatility than
ordinary Treasury securities and can expose a Fund to a greater risk of loss in
the market value of its portfolio. See "Investment Objectives and
Policies--Mortgage-Related Securities" (page 7) and "--Zero Coupon Treasury
Securities" (page 9) for a description of securities that may be referred to as
derivatives and certain risks associated with investing in them. In addition,
the use by either Fund of reverse repurchase agreements and dollar rolls
involves the speculative technique referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of a Fund's portfolio.
The Subadviser has developed a very active management style emphasizing
portfolio duration management on a daily basis in order to closely track the
duration, and hence the interest rate sensitivity, of a specified securities
index or other benchmark. The Subadviser intends to manage the duration of each
Fund to replicate that of a designated benchmark. At the time, the Subadviser
will seek to outperform a Fund's designated benchmark by adjusting the Fund's
sector weightings and selecting individual securities in a manner that is
consistent with the Fund's investment objective and policies. As a result of the
Subadviser's management style, each Fund may experience a high portfolio
turnover rate, which is not expected to exceed 400%.
For further discussion of additional risk considerations, see "Investment
Objectives and Policies--Special Investment Methods."
MANAGEMENT
BOARD OF DIRECTORS
As in all corporations, the business and affairs of the Company are managed
under the direction of the Company's Board of Directors. The Statement of
Additional Information contains general background information about each
director and officer of the Company.
INVESTMENT ADVISER
PNC Institutional Management Corporation (the "Adviser"), a wholly-owned
subsidiary of PNC Asset Management Group, Inc., which is in turn a wholly-owned
subsidiary of PNC Bank, National Association ("PNC Bank"), serves as the Funds'
investment adviser. The Adviser was organized in 1977 by PNC Bank to perform
advisory services for investment companies and has its principal offices at
Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809. PNC Asset Management Group, Inc.'s principal business address is 1835
Market Street, Philadelphia, Pennsylvania 19103. PNC Bank is a wholly-owned,
indirect subsidiary of PNC Bank Corp., and its principal business address is
Broad and Chestnut Streets, Philadelphia, Pennsylvania 19102. PNC Bank Corp., a
multi-bank holding company headquartered in Pittsburgh, Pennsylvania, is the
eleventh largest bank holding company in the United States. Categorized as a
super regional bank holding company, PNC Bank Corp. operates over 500 branch
offices in six U.S. states.
PNC Bank traces its money management services to individuals and
institutions to the year 1847, and is the second largest bank manager of
investments for individuals in the U.S. with $80 billion in discretionary trust
assets under management. PNC Bank Corp. and its affiliates are known for their
leadership and innovation in developing institutional investment products and
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services. Their activities are characterized by an overriding commitment to
quality and performance.
PNC Financial Services Group is PNC Bank Corp.'s mutual fund complex,
headquartered in Wilmington, Delaware. This group includes the Adviser, PFPC
Inc., and PNC Bank. The PNC Financial Services Group is one of the largest U.S.
bank managers of mutual funds with assets currently under management in excess
of $30 billion. This group, through PFPC Inc. and PFPC International Ltd., is
also a leading mutual fund service provider having contractual relationships
with approximately 400 mutual funds with 3.5 million shareholders and in excess
of $134 billion in assets. This group, through its PNC Institutional Investment
Service, provides investment research to over 250 financial institutions located
in the United States and abroad. PNC Bank provides custodial services for
approximately $217 billion in assets, including approximately $106 billion in
mutual fund assets.
The Adviser provides or oversees the provision of all investment advisory
services for the Company. Under the Investment Advisory Agreement, the Adviser
receives a monthly advisory fee computed separately for each Fund. Such fees are
payable at an annual rate of .40% of the average daily net assets of each Fund.
The Adviser has, however, agreed to waive a portion of its advisory fee, so that
the fee payable to it will be payable at the effective annual rate of .30% of
each Fund's average daily net assets through at least December 31, 1995.
Through February 16, 1995, the Company's corporate predecessor (the
"Predecessor Company") was subject to a management fee at an annual rate of .60%
of the average daily net assets of each Fund pursuant to an investment advisory
and management agreement between the Predecessor Company and Piper Trust
Company, the former investment adviser (the "former adviser"). However, as a
result of certain voluntary fee waivers and limitations by the former adviser,
the management fee paid by the Predecessor Company to the former adviser for the
fiscal year ended December 31, 1994 was paid at the effective annual rate of
.19% of the average daily net assets of Short Duration Fund and .17% of the
average daily net assets of Intermediate Duration Fund.
INVESTMENT SUBADVISER
BlackRock Financial Management, Inc. (the "Subadviser"), a wholly-owned
subsidiary of PNC Asset Management Group, Inc., which is in turn a wholly-owned
subsidiary of PNC Bank, serves as subadviser for both of the Funds. The
Subadviser is responsible for the day-to-day management of the Funds, and
generally makes all purchase and sale decisions regarding the portfolio
investments made by the Funds. In general, the Subadviser provides asset
management services to its clients with respect to high quality fixed income
instruments including mortgage-backed securities, U.S. Treasury securities,
municipal obligations, corporate bonds and hedging products. It currently
advises individual and institutional fixed income investors in the United States
and overseas through several funds and separately managed accounts with combined
total assets in excess of $23 billion. The Subadviser's address is 345 Park
Avenue, New York, New York 10154.
The Adviser has entered into a Subadvisory Agreement with the Subadviser
with respect to each Fund, pursuant to which the Adviser pays the Subadviser
monthly compensation payable over the same time periods and calculated in the
same manner as the investment advisory fee received by the Adviser from such
Fund. The fees to be paid by the Adviser to the Subadviser will equal, on an
annual basis, .25% of the average daily net assets of each Fund. The Subadviser
will
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waive its subadvisory fee and reimburse expenses to the extent of one-half of
any fee waivers or expense reimbursements undertaken by the Adviser. The fee
paid by the Adviser to the Subadviser comes out of the Adviser's advisory fee
from the Funds, and is not an additional charge to the Funds. See "Fees and
Expenses."
Through February 16, 1995, Piper Capital Management Incorporated (the
"former subadviser"), an affiliate of the former adviser, performed subadvisory
services for both Funds, and PNC Bank performed subadvisory services for
Intermediate Duration Fund. The former adviser to the Predecessor Company
compensated the former subadviser at the effective annual rate of .05% of the
average daily net assets of Short Duration Fund and .04% of the average daily
net assets of Intermediate Duration Fund. PNC Bank was compensated by the former
adviser at the effective annual rate of .01% of the average daily net assets of
Intermediate Duration Fund.
SHORT DURATION FUND AND INTERMEDIATE DURATION FUND PORTFOLIO
MANAGERS. Scott Amero and Keith Anderson will be primarily responsible for the
day-to-day management of the Short Duration Fund's and Intermediate Duration
Fund's portfolios, respectively. They have served in these respective capacities
since 1995. Both Mr. Anderson and Mr. Amero are managing directors of the
Subadviser. Mr. Anderson has been with the Subadviser since its founding in
1988; in addition to his primary responsibility for managing client portfolios,
he is also co-head of the firm's Portfolio Management Group and a member of its
Management Committee and Investment Strategy Committee. Mr. Amero has been with
the Subadviser since 1990; in addition to his primary responsibility for
managing client portfolios, he is also a member of the firm's Investment
Strategy Committee.
The Subadviser's investment management personnel include several
individuals with extensive experience in creating, evaluating and investing in a
broad range of fixed income securities including mortgage-backed securities,
U.S. Treasury securities, municipal obligations, corporate bonds, and hedging
products. Prior to co-founding the Subadviser, from July 1976 to March 1988,
Laurence D. Fink, the Chairman and Chief Executive Officer of the Subadviser,
was employed by The First Boston Corporation where he had been a Managing
Director since January 1979. At First Boston, he was a member of the Management
Committee and co-head of its Taxable Fixed Income Division. He also managed the
Financial Futures and Fixed Income Options Department and the Mortgage and Real
Estate Products Group. Ralph L. Schlosstein, President and a co-founder of the
Subadviser, was employed by Lehman Brothers from February 1981 to March 1988 and
became a Managing Director in August 1984. At Lehman Brothers, he was co-head of
the Mortgage and Savings Institutions Group. Messrs. Fink and Schlosstein, along
with other members of the Subadviser, were instrumental in many of the major
innovations in the securities markets, including the creation of the fixed and
floating rate collateralized mortgage obligation, asset-backed securities and
the senior-subordinated mortgage pass-through instrument.
SHAREHOLDER SERVICE PLAN
The Company has adopted Shareholder Service Plans for each of the Short
Duration Fund and Intermediate Duration Fund pursuant to which shareholder
servicing is provided to shareholders. The Shareholder Service Plans were
adopted pursuant to Rule 12b-1 under the 1940 Act. The Shareholder Service Plans
provide that each Fund pays Provident Distributors, Inc. (the "Distributor") a
shareholder servicing fee relating to the shares of the relevant Fund, accrued
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<PAGE> 17
daily and paid monthly, at the annual rate of .10% of the average daily net
assets of such Fund in order to compensate the Distributor for providing
shareholder servicing activities. Such shareholder servicing activities may
include, without limitation, responding to shareholder inquiries and providing
reports and other information.
DISTRIBUTOR
Provident Distributors, Inc., 259 Radnor-Chester Road, Suite 120, Radnor,
Pennsylvania 19087, acts as the principal distributor of the Funds' shares. The
Distributor, out of its own assets, may pay for certain expenses incurred in
connection with the distribution of shares of the Funds. In particular,
financial institutions that have entered into service agreements with the
Distributor may be paid an amount equal to .10% of the offering price of Fund
shares purchased by their clients. In addition, such financial institutions may
receive ongoing payments from the Distributor for their servicing and/or
maintenance of shareholder accounts in an amount up to .10% of the average daily
net assets of the Fund attributable to shares serviced by them.
ADMINISTRATOR
PFPC Inc., Bellevue Park Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 ("PFPC"), performs various administrative services
for each Fund. These services include maintenance of books and records,
preparation of governmental filings and shareholder reports and computation of
net asset values and daily dividends. For its administrative services, PFPC
receives a fee, payable monthly, of .15% per annum of the average daily net
assets of each Fund, plus any out-of-pocket expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PFPC serves as the Funds' transfer agent, dividend disbursing agent and
registrar. In its capacity as transfer agent, dividend disbursing agent and
registrar, PFPC performs bookkeeping, data processing and administrative
services incidental to the maintenance of shareholder accounts. PNC Bank, 200
Stevens Drive, Lester, Pennsylvania 19113, serves as custodian for the Funds'
portfolio securities and cash.
EXPENSES
The expenses of each Fund are deducted from total income before dividends
are paid. These expenses include, but are not limited to, organizational costs,
fees paid to the Adviser, the Distributor and PFPC, fees and expenses of
officers and directors, taxes, legal fees, transfer agent, dividend disbursing
agent and custodian fees, auditing fees, brokerage fees and commissions, fees
and expenses of registering and qualifying the Funds and their shares for
distribution under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information annually to
existing shareholders, the expense of reports to shareholders, shareholders'
meetings and proxy solicitations and other expenses which are not expressly
assumed by the Adviser under the Investment Advisory Agreement. Any general
expenses of the Company that are not readily identifiable as belonging to a
particular Fund will be allocated between the Funds based upon the relative net
assets of the Funds at the time such expenses were accrued.
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PORTFOLIO TRANSACTIONS
Portfolio transactions for the Funds are generally effected on a net basis
without payment of brokerage commissions. The Adviser and Subadviser may
consider a number of factors in determining which brokers to use for portfolio
transactions. The factors, which are more fully discussed in the Statement of
Additional Information, include, but are not limited to, research services,
favorableness of the net price and quality of services and execution. A broker's
sales of shares of any series of the Company may also be considered a factor if
the Adviser or Subadviser is satisfied that the Funds would receive from that
broker the most favorable price and execution then available for a transaction.
Portfolio transactions for the Funds will generally be with the issuer or with
dealers acting on a principal basis. For more information, see "Portfolio
Transactions and Allocation of Brokerage" in the Statement of Additional
Information.
BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company for and upon the order of
customers. PNC Bank, the Adviser and PFPC are subject to such banking laws and
regulations, but believe they may perform the services for the Fund contemplated
by their respective agreements, this Prospectus and the Statement of Additional
Information without violating applicable banking laws or regulations.
PURCHASE OF SHARES
The Funds' shares may be purchased by contacting PFPC by telephone at (800)
441-7450. The Funds reserve the right to reject any purchase order. To eliminate
the need for safekeeping, the Funds will not issue stock certificates unless
requested by a shareholder. All share purchases for which certificates are not
issued will be credited to the shareholder's account on the Funds' books
maintained by PFPC.
PUBLIC OFFERING PRICE
Fund shares are offered to the public without a sales charge at the net
asset value per share next determined after an order and payment are received in
proper form by PFPC, and the order has been accepted. It is the responsibility
of any authorized financial institution through which the Funds' shares may be
purchased to transmit orders received by it from investors to PFPC in a timely
manner. Net asset value is determined as set forth under "Valuation of Shares."
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customer fees for services provided in connection with their
accounts. An investor should, therefore, consider the terms of its account with
such an institutional investor before determining to purchase shares of a Fund.
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ORDER AND PAYMENT PROCEDURES
Purchase orders are accepted on each Business Day before 12:00 noon, New
York City time. (As used in this Prospectus, the term "Business Day" means any
day on which the New York Stock Exchange and the Federal Reserve Bank of
Philadelphia are both open for business. Currently, one or both of these
entities is closed on the customary national business holidays of New Year's Day
(observed), Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day (observed), Independence Day (observed), Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day (observed)). Once PFPC has the necessary
and desirable information on file, purchase orders may be placed by contacting
PFPC by telephone at (800) 441-7450. Payment must be in the form of Federal
funds, and any payment by check or otherwise not made in Federal funds will be
returned promptly to the investor. Orders are effected as of 4:00 p.m., New York
City time, on the day the order is accepted and payment received, and will
receive the dividend declared the following day. Payment must be received by the
Funds' custodian by 4:00 p.m. on the day of the order or the order will be
canceled. Federal funds should be wired for the purchase of Fund shares in the
purchaser's name (please also include purchaser's account number) to PNC Bank,
Philadelphia, PA, ABA #0310 000 53, Mutual Funds Service/AC-85-2999-2181, and
the wire should specify the Fund in which shares are being purchased.
Any Federal funds received in respect of a canceled order will be returned
upon instructions from the sender without any liability of the Funds or their
service providers. If it is not possible to return such Federal funds the same
day, the sender will not have the use of such funds until the next day on which
it is possible to effect such return.
MINIMUM INVESTMENTS
The minimum initial investment in each Fund is $5,000. There is no minimum
subsequent investment. Each Fund reserves the right to accept smaller purchases
at its sole discretion.
EXCHANGE PRIVILEGE
Shares of either Fund may be exchanged for shares of the other Fund on the
basis of current net asset values of such shares next determined after PFPC's
receipt of a request for an exchange. For additional information, contact the
Funds. The Company reserves the right to change or discontinue the exchange
privilege, or any aspect of the privilege, upon 60 days' written notice.
REDEMPTION OF SHARES
GENERAL
Shares of each Fund, in any amount, may be redeemed at any time at their
current net asset value next determined after receipt of a redemption request.
Redemption requests may be made by contacting PFPC by telephone at (800)
441-7450.
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TELEPHONE REDEMPTION
Shareholders are automatically provided with telephone redemption
privileges when opening an account. Shareholders holding share certificates are
not eligible to redeem shares by telephone because share certificates must
accompany all redemption requests.
All redemption requests received in proper order prior to 4:00 p.m., New
York City time, on a Business Day or other day redemptions are permitted, are
effected immediately after 4:00 p.m., New York City time, on the day they are
received. If the request is received before 12:00 noon, New York City time, on a
Business Day, the proceeds will normally be wired in Federal funds to the
shareholder's bank or other account shown on the Fund's records the next
Business Day, but in no case later than seven days. If the request is received
between 12:00 noon and 4:00 p.m., New York City time, on a Business Day or other
day redemptions are permitted, the proceeds will be sent the second following
Business Day.
The Company will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine, and if the Company does not
employ such procedures with respect to a Fund, it may be liable for any losses
due to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for any loss, liability, cost or expense for following their telephone
transaction procedures (described below) or for following instructions
communicated by telephone that they reasonably believe to be genuine.
The Funds' telephone transaction procedures include the following measures:
(1) requiring the caller to provide the name of the account owner, the account
number and the name of the Fund, all of which must match the Fund's records; (2)
requiring the caller to know the password specified for the account; (3)
requiring that redemption proceeds be sent by wire only to the owners of record
at the bank account of record; (4) sending a written confirmation for each
telephone transaction to the owners of record at the address of record within
five business days of the call; and (5) maintaining tapes of telephone
transactions for six months, if the Fund elects to record shareholder telephone
transactions.
For accounts held of record by a broker-dealer or financial institution,
additional documentation or information regarding the scope of a caller's
authority is required. Finally, for telephone transactions in accounts held
jointly, additional information regarding other account holders is required.
A shareholder will receive dividends declared only through the day its
redemption is effected. Because proceeds to redeeming shareholders will not be
wired until the second Business Day following receipt by PFPC of redemption
requests between 12:00 noon and 4:00 p.m., the Company recommends that all
redemption requests be placed so as to be received by PFPC prior to 12:00 noon,
New York City time, on a Business Day to help to ensure the earliest possible
return of proceeds to the investor.
PAYMENT OF REDEMPTION PROCEEDS
Normally, the Funds will make payment for all shares as discussed above,
and in no event will payment be made more than seven days after receipt by PFPC
of a redemption request in proper order. However, payment may be postponed or
the right of redemption suspended for more than seven days under unusual
circumstances, such as when trading is not taking place on the New York Stock
Exchange.
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INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem a shareholder's account at any time
the net asset value of the account falls below $500 as the result of a
redemption or transfer request. Shareholders will be notified in writing prior
to any such redemption and will be allowed 30 days to make additional
investments before the redemption is processed.
VALUATION OF SHARES
The Funds determine their net asset value on each Business Day, provided
that the net asset value need not be determined for a Fund on days on which
changes in the value of the Fund's portfolio securities will not materially
affect the current net asset value of the Fund's shares and days when no Fund
shares are tendered for redemption and no order for Fund shares is received. For
each Fund, the calculation is made as of the primary closing time of the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) after
the Funds have declared any applicable dividends.
The net asset value per share for a Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less all
liabilities by the number of Fund shares outstanding. For the purpose of
determining the aggregate net assets of a Fund, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued.
The value of most fixed-income securities held by the Funds will be
provided by dealers or by an independent pricing service that has been approved
by the Company's Board of Directors that considers such factors as transactions
in such securities, quotations from dealers, market transactions in comparable
securities, various relationships between securities, and yield to maturity in
determining value. Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost. In addition, any securities or other assets
of a Fund for which market prices or quotations are not readily available will
be valued at their fair value in accordance with procedures established in good
faith by the Company's Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income will be paid on a monthly basis by the
Funds. The Funds will distribute net realized capital gains, if any, on an
annual basis.
The net investment income of each Fund will be declared as dividends daily.
Dividends will be reinvested in additional Fund shares on a monthly basis unless
the shareholder requests cash payments as described below. Shares purchased on a
day on which the Funds calculate their net asset value begin accruing dividends
on the following day, and shares redeemed will earn dividends through the date
of redemption.
All net investment income dividends and net realized capital gains
distributions with respect to the shares of each Fund will be payable in
additional shares of such Fund at net asset value unless the shareholder
notifies PFPC in writing of an election to receive cash. Shareholders may elect
either to receive income dividends in cash and capital gains in additional
shares of the Fund
21
<PAGE> 22
at net asset value, or to receive both income dividends and capital gains in
cash. Any such request will become effective with respect to dividends paid
after its receipt by PFPC.
Any shareholder with an account in either of the Funds may direct that
income dividends and capital gains distributions from that Fund be invested in
the other Fund. Any such investment will be made at net asset value and will not
be subject to a minimum initial investment amount except that, in order to
invest dividends and distributions in another Fund, an investor must hold shares
in such Fund (including shares being acquired with such dividend or
distribution) with a value at least equal to such Fund's minimum initial
investment amount as of the date of the dividend or distribution.
A Fund may at times pay out less than the entire amount of net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. Any such amount retained by a Fund would be
available to stabilize future distributions. As a result, the distributions paid
by a Fund for any particular period may be more or less than the amount of net
investment income earned by the Fund during such period.
TAXES
Each Fund has qualified and intends to qualify in the future as a separate
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). If so qualified, a Fund will not be liable for Federal income
taxes to the extent it distributes to shareholders an amount equal to at least
the sum of 90% of its investment company taxable income and 90% of its
tax-exempt interest income (if any) net of certain deductions for the applicable
taxable year.
Dividends from net investment income are generally taxable to shareholders
as ordinary income, whether received in cash or additional shares of the Fund
(or, at the option of the shareholder, shares of another Fund). Distributions of
net capital gains (designated as "capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the shares of the Fund.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange.
This capital gain or loss will be long-term if the shares have been held for
more than one year. Any capital loss recognized on the sale or exchange of Fund
shares held not longer than six months will be treated as long-term capital loss
to the extent of any capital gain dividends received with respect to such
shares.
In connection with a Fund distribution, the per share net asset value is
reduced by the per share amount of the distribution. If a shareholder buys
shares prior to the record date, he will pay the full price for the shares and
then receive a portion of the price back as a taxable distribution.
The foregoing relates to Federal tax laws in effect as of the date of this
Prospectus, and is only a general summary of important tax considerations
generally affecting the Funds and their shareholders. Accordingly, shareholders
should consult their own tax advisers with respect to their particular tax
situations and the applicability of state and local tax laws. See "Taxation" in
the Statement of Additional Information for more information.
22
<PAGE> 23
PERFORMANCE COMPARISONS
Advertisements and other sales literature for a Fund may refer to the
Fund's "average annual total return" and "cumulative total return." In addition,
both of the Funds may provide yield calculations in advertisements and other
sales literature. All such yield and total return quotations are based upon
historical earnings and are not intended to indicate future performance.
Yield calculations for a Fund will be based upon a 30-day period stated in
the advertisement and will be calculated by dividing the net investment income
per share (as defined under SEC rules and regulations) earned during the
advertised period by the offering price per share on the last day of the period.
The result will then be "annualized" using a formula that provides for
semi-annual compounding of income. The "effective yield" is calculated similarly
but, when annualized, the income earned by an investment in the Fund is assumed
to be reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the redeemable value of such payment at the end
of the advertised period, dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating average annual and cumulative total return, all
dividends and distributions are assumed to be reinvested.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Funds' shares. The
performance of Short Duration Fund may be compared to the performance of the
Merrill Lynch 1-3 Year Government Index, the Lipper ARM Fund Average, the Lipper
Short-Intermediate Fund Average and the Lehman 1-3 Year Government Index and the
performance of Intermediate Duration Fund may be compared to the performance of
the Lehman Government Corporate Index.
For additional information regarding the calculation of yield, average
annual total return and cumulative total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
Additional information about the Funds' performance is contained in the
Funds' annual report, which is available upon request without charge.
GENERAL INFORMATION
The Company is authorized to issue a total of 100 billion shares of common
stock, with a par value of $.001 per share. Two hundred million of these shares
have been authorized by the Board of Directors to be issued in two separate
series of common stock as follows: 100 million shares designated as Short
Duration Fund, and 100 million shares designated as Intermediate Duration Fund.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue other series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. All classes of shares in a Fund would be identical except that each
class of shares would be available through a different distribution channel and
certain classes might incur different expenses for the provision of distribution
services or the provision of shareholder services or
23
<PAGE> 24
administration assistance by institutions. Shares of each class would share
equally in the gross income of a Fund, but any variation in expenses would be
charged separately against the income of the particular class incurring such
expenses. This would result in variations in net investment income accrued and
dividends paid by and in the net asset value of the different classes of a Fund.
This ability to create multiple classes of shares within each Fund will allow
the Company in the future the flexibility to better tailor its methods of
marketing, administering and distributing shares of the Funds to the needs of
particular investors and to allocate expenses related to such marketing,
administration and distribution methods to the particular classes of
shareholders of the Fund incurring such expenses.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and, in such
event, the holders of the remaining shares will be unable to elect any
directors.
On an issue affecting only a particular series, the shares of the affected
series vote separately. An example of such an issue would be a fundamental
investment restriction pertaining to only one series. In addition, in voting on
an investment advisory agreement, approval of the agreement by the shareholders
of a particular series would make the agreement effective as to that series
whether or not it had been approved by the shareholders of any other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
The By-Laws of the Company provide that annual shareholder meetings be held
only when required to be held by Maryland law or when called by the Board of
Directors or by an officer or officers authorized to take such action by the
Board of Directors. Maryland corporation law requires that a corporation
registered under the 1940 Act hold an annual meeting only when required by the
1940 Act to act upon the election of directors. In addition, the By-Laws provide
that shareholders may call a special meeting upon a vote of 10% or more of the
outstanding shares of the Company entitled to be cast with respect to any matter
to be voted upon. In addition, the 1940 Act requires a shareholder vote for all
amendments to fundamental investment policies and restrictions and for all
amendments to investment advisory contracts. The 1940 Act also provides that
directors of the Company may be removed by action of the record holders of
two-thirds or more of the outstanding shares of the Company. The directors are
required to call a meeting of
24
<PAGE> 25
shareholders for the purpose of voting upon the question of removal of any
director when so requested in writing by the record holders of at least 10% of
the Company's outstanding shares.
Each Fund periodically sends financial and other reports and communications
(including, but not limited to, annual and semi-annual financial statements) to
its shareholders. Unless otherwise required by law, each Fund intends to mail
one of each such report or communication to each individual mailing address,
which may be the address of one or multiple shareholders of record. However,
shareholders have the right to receive additional copies of each such report or
communication without charge upon written request to the applicable Fund(s).
25
<PAGE> 26
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS
(AND/OR IN THE STATEMENT OF
ADDITIONAL INFORMATION
REFERRED TO ON THE COVER PAGE
OF THIS PROSPECTUS), AND, INSTITUTIONAL
IF GIVEN OR MADE, SUCH PROVIDENT
INFORMATION OR FUNDS, INC.
REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR
THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR
SOLICITATION BY THE COMPANY
OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE
MADE.
---------------------------------------------------------------------------
PROVIDENT INSTITUTIONAL
FUNDS, INC.
INVESTMENT ADVISER
PNC INSTITUTIONAL MANAGEMENT
CORPORATION
INVESTMENT SUBADVISER
BLACKROCK FINANCIAL SHORT DURATION FUND
MANAGEMENT, INC. INTERMEDIATE DURATION FUND
ADMINISTRATOR AND
TRANSFER AGENT
PFPC INC.
CUSTODIAN
PNC BANK, NATIONAL
ASSOCIATION
DISTRIBUTOR [PROVIDENT
PROVIDENT DISTRIBUTORS, INC. INSTITUTIONAL
FUND LOGO]
INDEPENDENT AUDITORS
KMPG PEAT MARWICK LLP
---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Introduction................... 2
Fees and Expenses.............. 4
Financial Highlights........... 5
Investment Objectives and
Policies..................... 6
Special Investment Methods..... 10
Risk Considerations............ 13
Management..................... 14
Purchase of Shares............. 18
Redemption of Shares........... 19
Valuation of Shares............ 21
Dividends, Distributions and
Tax Status................... 21
Performance Comparisons........ 23
General Information............ 23
</TABLE>
Prospectus
PIFI-P-001 April 28, 1995
- --------------------------------------------------------------------------------
<PAGE> 27
PROVIDENT INSTITUTIONAL FUNDS, INC.
SHORT DURATION FUND
INTERMEDIATE DURATION FUND
STATEMENT OF ADDITIONAL INFORMATION
April 28, 1995
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated April 28, 1995, and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained from the Funds by calling (800) 821-7432.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS . . . . . . . . . . . . B-2
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . B-9
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . B-15
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE . . . . . . . . . . B-19
CAPITAL STOCK AND OWNERSHIP OF SHARES . . . . . . . . . . . . . . . . B-20
NET ASSET VALUE AND PUBLIC OFFERING PRICE . . . . . . . . . . . . . . B-21
CALCULATION OF PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . B-21
REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-23
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-23
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . FS-1
</TABLE>
<PAGE> 28
THE COMPANY
Provident Institutional Funds, Inc. (the "Company") is an
open-end management investment company organized under the laws of the State of
Maryland. The Company is the successor by merger to Piper Trust Funds Inc., a
Minnesota corporation that merged with and into the Company effective February
17, 1995, with the Company surviving. The shares are currently offered in two
series: Short Duration Fund and Intermediate Duration Fund (sometimes referred
to herein individually as a "Fund" or, together, as the "Funds").
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of the Funds are set
forth in the Prospectus. Certain additional investment information is set
forth below.
GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES
As set forth in the Prospectus, the Funds will invest in U.S.
Treasury bills, notes and bonds and other securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities") and repurchase agreements fully secured by U.S. Government
Securities. Included in the U.S. Government Securities the Funds may purchase
are pass-through securities and collateralized mortgage obligations ("CMOs").
Mortgages backing these securities purchased by the Funds include, among
others, conventional 30-year fixed rate mortgages, graduated payment mortgages,
15-year mortgages and adjustable rate mortgages. The current issuers and
guarantors of mortgage-related securities in which the Funds may invest are the
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Association. A description of
the mortgage-related securities in which the Funds may invest is contained in
the Prospectus. Additional information with respect to these mortgage-related
securities is set forth below.
GNMA Pass-Through Securities. The Government National
Mortgage Association ("GNMA") issues mortgage-backed securities ("GNMA
Certificates") which evidence an undivided interest in a pool or pools of
mortgages. GNMA Certificates that the Funds purchase are the "modified
pass-through" type, which entitle the holder to receive timely payment of all
interest and principal payments due on the mortgage pool, net of fees paid to
the "issuer" and GNMA, regardless of whether the mortgagor actually makes the
payment.
The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or guaranteed
by the Veterans Administration ("VA").
B-2
<PAGE> 29
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates at a premium in the
secondary market.
FHLMC Pass-Through Securities. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of Title III of the
Emergency Home Finance Act of 1970. Its purpose is to promote development of a
nationwide secondary market in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"), mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FHLMC guarantees timely monthly payment
of interest on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semiannually and return
principal once a year in guaranteed minimum payments. The expected average
life of these securities is approximately ten years. The FHLMC guarantee is
not backed by the full faith and credit of the United States.
FNMA Pass-Through Securities. The Federal National Mortgage
Association ("FNMA") was established in 1938 to create a secondary market in
mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates
("FNMA Certificates" ). FNMA Certificates resemble GNMA Certificates in that
each FNMA Certificate represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment
of interest and principal on FNMA Certificates. The FNMA guarantee is not
backed by the full faith and credit of the United States.
B-3
<PAGE> 30
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable Rate Mortgage Securities ("ARMS") are
mortgage-related securities that, unlike fixed-rate mortgage securities, have
periodic adjustments in the coupons on the underlying mortgages. The interest
rates on ARMS are reset at periodic intervals (generally one year or less) to
an increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury note rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities,
the 11th District Federal Home Loan Bank Cost of Funds Index, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered
Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds Index (often related to ARMS issued by
FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile. The Subadviser (defined below) will seek to diversify Fund
investments in ARMS among a variety of indices and reset periods so that a Fund
is not at any one time unduly exposed to the risk of interest rate
fluctuations. In selecting a type of ARMS for investment, the Subadviser will
also consider the liquidity of the market for such ARMS.
The underlying adjustable rate mortgages which back ARMS in
which the Funds invest will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change up
or down (1) per reset or adjustment interval and (2) over the life of the loan.
Some residential adjustable rate mortgage loans restrict periodic adjustments
by limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization; i.e., an increase in the balance of the mortgage loan.
ARMS, like other mortgage-related securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of principal
it receives, it may receive a rate of interest which is lower than the rate on
the existing ARMS. For this reason, ARMS are less effective than longer-term
debt securities as a means of "locking-in" long-term interest rates.
ARMS, while having less risk of price decline during periods
of rapidly rising rates than other investments of comparable maturities, will
have less potential for capital appreciation due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
ARMS are purchased at a premium, unscheduled principal
B-4
<PAGE> 31
prepayments will result in some loss of the holders' principal investment to
the extent of the premium paid. On the other hand, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment
of principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to shareholders, will be taxable
as ordinary income.
OTHER FLOATING RATE MORTGAGE-RELATED SECURITIES
As set forth in the Prospectus, the Funds may invest in collateralized
mortgage obligations and multi-class pass-through securities (collectively,
"CMOs") with floating interest rates. Like ARMS, the interest rates on such
CMOs are reset at periodic intervals to an increment over some predetermined
interest rate index. The commonly utilized indices are the same as those set
forth above under "--Adjustable Rate Mortgage Securities."
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements. The
Funds' custodian or sub-custodian will maintain the securities underlying any
repurchase agreement. The market value of the collateral underlying the
repurchase agreement will be determined on each business day. If at any time
the market value of the collateral falls below the repurchase price of the
repurchase agreement (including any accrued interest), the respective Fund will
promptly receive additional collateral (so the total collateral is an amount at
least equal to the repurchase price including accrued interest).
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each of the Funds may purchase securities offered on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. When a Fund purchases securities on a when-issued or
forward commitment basis, it will maintain in a segregated account with its
custodian cash or liquid high-grade debt obligations having an aggregate value
equal to the amount of such purchase commitments until payment is made; a Fund
will likewise segregate securities it sells on a forward commitment basis. The
purchase of securities on a when-issued or forward commitment basis may
increase the volatility of the Funds' net asset value to the extent the Funds
make such purchases while remaining substantially fully vested.
ILLIQUID SECURITIES
As set forth in the Prospectus, a Fund may invest in
securities that might otherwise be deemed to be illiquid and treat such
securities as liquid when they have been determined to be liquid by the Board
of Directors of the Company or by the Adviser (or Subadviser), subject to the
oversight of and pursuant to guidelines adopted by the Board of Directors.
Under these guidelines, a security may be deemed liquid if it can be disposed
of promptly in the ordinary course of business at a value reasonably close to
that used in the calculation of net asset value. Factors taken into account in
determining the liquidity of a security may include (a) the frequency of trades
and quotes for the security; (b) the number
B-5
<PAGE> 32
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (c) dealer undertakings to make a market in the security;
and (d) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
HIGH RISK MORTGAGE SECURITIES
As stated in the Prospectus, each Fund will invest in U.S.
Government Securities that are deemed to be Type I Securities by the Office of
the Comptroller of the Currency (the "OCC") under 12 C.F.R. 1.3 ("Type I
Securities"), repurchase agreements fully secured by Type I Securities and,
with respect to no more than 10% of its total assets, open-end investment
companies that invest solely in Type I Securities and repurchase agreements
fully secured by Type I Securities. The Funds invest only in securities in
which national banks supervised by the OCC may invest under applicable Federal
law and the regulations and supervisory policies of the OCC. However, neither
Fund will invest more than 20% of its total assets in mortgage-related or
certain other securities that are considered "high risk" under applicable
supervisory policies of the OCC. Notwithstanding the foregoing, neither Fund
will invest in the following high risk securities: interest-only securities,
principal-only securities and inverse floating securities. According to
applicable OCC supervisory policies, in general any mortgage derivative product
that exhibits greater price volatility than a benchmark fixed rate thirty-year
mortgage-backed pass-through security will be deemed to be high risk.
Securities and other products having risk characteristics similar to high-risk
mortgage securities may be considered high risk securities. In OCC Banking
Circular 228 (Rev.) (January 10, 1992), the OCC defined "high-risk mortgage
security" as any mortgage derivative product that at the time of purchase, or
at a subsequent testing date, meets any of the following three tests:
(1) Average Life Test. The mortgage derivative product has an
expected weighted average life greater than 10.0 years.
(2) Average Life Sensitivity Test. The expected weighted average
life of the mortgage derivative product:
a. Extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points,
or
b. Shortens by more than 6.0 years, assuming an immediate
and sustained parallel shift in the yield curve of minus 300 basis
points.
(3) Price Sensitivity Test. The estimated change in the price of
the mortgage derivative product is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis points.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual
purchases or sales of portfolio securities to the average monthly value of
portfolio securities, not including securities maturing in less than 12 months.
A 100% portfolio turnover rate would occur, for
B-6
<PAGE> 33
example, if the lesser of the value of purchases or sales of portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned during such year. For purposes of calculating
portfolio turnover, the maturity of investment purchases and sales related to
"rollover" transactions is considered to be less than 12 months. See "Special
Investment Methods--When-Issued and Forward Commitment Securities" in the
Prospectus.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set
forth in the Prospectus, each of the Funds is subject to certain investment
restrictions, as set forth below, which may not be changed without the vote of
a majority of the Fund's outstanding shares. "Majority," as used in the
Prospectus and in this Statement of Additional Information, means the lesser of
(a) 67% of a Fund's outstanding shares present at a meeting of the holders if
more than 50% of the outstanding shares are present in person or by proxy or
(b) more than 50% of a Fund's outstanding shares.
Unless otherwise specified below, neither of the Funds will:
1. With respect to 75% of its total assets, invest more than 5%
of the value of its total assets in the securities of any one issuer or own
more than 10% of the outstanding voting securities of any one issuer, in each
case other than U.S. Government Securities.
2. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in any one
industry, other than mortgage-related securities. This restriction does not
apply to U.S. Government Securities and repurchase agreements relating thereto.
3. Borrow money, except from banks for temporary or emergency
purposes. Each Fund may borrow money in an amount up to one-third of the value
of its total assets in order to meet redemption requests without immediately
selling any of its portfolio securities. If, for any reason, the current value
of the Fund's total assets falls below an amount equal to three times the
amount of its indebtedness from money borrowed, the Fund will, within three
days, reduce its indebtedness to the extent necessary. Neither Fund will
purchase portfolio securities while outstanding borrowings exceed 5% of the
value of the Fund's total assets. The Funds do not consider reverse repurchase
agreements to be borrowings for purposes of the investment policies set forth
in this paragraph.
4. Mortgage, pledge or hypothecate its assets except to secure
permitted indebtedness. For purposes of this policy, collateral arrangements
with respect to reverse repurchase agreements, margin deposits for futures
contracts and options, or collateral arrangements with respect to similar
investment techniques are not deemed to be a pledge or hypothecation of assets.
B-7
<PAGE> 34
5. Issue any senior securities (as defined in the Investment
Company Act of 1940, as amended), other than as set forth in restriction number
3 above and except to the extent that using futures contracts and options
thereon, purchasing or selling securities on a when-issued or forward
commitment basis or using similar investment strategies may be deemed to
constitute issuing a senior security.
6. Act as an underwriter of securities of other issuers, except
insofar as a Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
7. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real estate or
interests therein (including mortgage-related securities and similar
securities) as set forth in the Prospectus.
8. Purchase or sell commodities, except that the Funds may engage
in financial futures contracts and related options transactions.
9. Make loans of money or property to any person, except for
loans of portfolio securities and except through the use of repurchase
agreements or the purchase of debt obligations in which such Fund may invest
consistently with the Fund's investment objective and policies.
In addition, as non-fundamental investment restrictions that
may be changed at any time without shareholder approval, neither Fund will:
(a) Purchase or retain the securities of any issuer if, to
the Fund's knowledge, those officers or directors of the Company or its
affiliates or of its investment adviser who individually own beneficially more
than 0.5% of the outstanding securities of such issuer, together own more than
5% of such outstanding securities.
(b) Invest for the purpose of exercising control or
management.
(c) Purchase or sell oil, gas or mineral leases or interests
in oil, gas or other mineral exploration or development programs.
(d) Invest more than 10% of its total assets in the
securities of other investment companies or more than 5% of its total assets in
the securities of any one investment company, nor may it own more than 3% of
the outstanding voting securities of any investment company, except as part of
a merger, consolidation or acquisition of assets.
(e) Invest more than 15% of its net assets in illiquid
securities.
(f) Invest in real estate limited partnerships.
B-8
<PAGE> 35
(g) Invest in warrants.
(h) Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of transactions.
(i) Write, purchase or sell puts, calls or combinations
thereof, other than options on futures contracts.
Any investment restriction or limitation referred to above or
in the Prospectus, except the borrowing policy, which involves a maximum
percentage of securities or assets, shall not be considered to be violated
unless an excess over the percentage occurs immediately after an acquisition of
securities or utilization of assets and results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, ages and principal occupations during the past five years
of the directors and executive officers of the Company are given below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS AND AGE POSITION WITH FUND PAST FIVE YEARS
--------------------- ------------------ ---------------
<S> <C> <C>
Philip E. Coldwell(3,4) Director Economic Consultant; Chairman, Coldwell
Coldwell Financial Consultants Financial Consultants; Member of the Board
3330 Southwestern Blvd. of Governors of the Federal Reserve System
Dallas, TX 75225 from 1974 to 1980; Director, Maxus Energy
Age 72 Corporation (energy products) from 1989 to
1993; Director or Trustee of The PNC Fund,
Temporary Investment Fund, Inc., Trust for
Federal Securities, Municipal Fund for
Temporary Investment and Portfolios for
Diversified Investment.
</TABLE>
B-9
<PAGE> 36
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS AND AGE POSITION WITH FUND PAST FIVE YEARS
--------------------- ------------------ ---------------
<S> <C> <C>
Robert R. Fortune(2,3,4) Director Financial Consultant; Chairman, President
2920 Ritter Lane and Chief Executive Officer, Associated
Allentown, PA 18104 Electric & Gas Insurance Services Limited
Age 78 from 1984 to 1993; Member of the Financial
Executives Institute and American Institute
of Certified Public Accountants; Director or
Trustee of The PNC Fund, Temporary
Investment Fund, Inc., Trust for Federal
Securities, Municipal Fund for Temporary
Investment, Portfolios for Diversified
Investment and Independence Square Income
Securities, Inc.; Managing General Partner,
Chestnut Street Exchange Fund; Director,
Prudential Utility Fund, Inc., Prudential
Structured Maturity Fund, Inc and Prudential
IncomeVertible Fund, Inc.
Rodney D. Johnson(4) Director President, Fairmount Capital Advisors, Inc.
Fairmount Capital Advisors, Inc. (financial advisers) since 1987; Treasurer,
1435 Walnut St. North Philadelphia Health System (formerly
Philadelphia, PA 19102 Girard Medical Center) from 1988 to 1992;
Age 53 Member, Board of Education, School District
of Philadelphia, 1983 to 1988; Chair, Fox Chase
Cancer Center Board of Advocates, 1993 - Present;
Director or Trustee of The PNC Fund,
Temporary Investment Fund, Inc., Trust for
Federal Securities, Municipal Fund for
Temporary Investment, Portfolios for
Diversified Investment, Municipal Fund for
California Investors, Inc., Municipal Fund
for New York Investors, Inc. and
International Dollar Reserve Fund.
</TABLE>
B-10
<PAGE> 37
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS AND AGE POSITION WITH FUND PAST FIVE YEARS
--------------------- ------------------ ---------------
<S> <C> <C>
G. Willing Pepper(1,2) Chairman of the Retired; Chairman of the Board, Specialty
128 Springton Lake Road Board and President Composites Corporation until May 1984;
Media, PA 19063 Chairman of the Board, The Institute for
Age 87 Cancer Research until 1979; Director,
Philadelphia National Bank until 1978;
President, Scott Paper Company from 1971 to
1973; Director, Marmon Group, Inc. until
April 1986; Director or Trustee of The PNC
Fund, Temporary Investment Fund, Inc., Trust
for Federal Securities, Municipal Fund for
Temporary Investment, Portfolios for
Diversified Investment, Municipal Fund for
California Investors, Inc. and Independence
Square Income Securities, Inc.; Managing
General Partner, Chestnut Street Exchange
Fund.
Anthony M. Santomero Director Deputy Dean, December 1990 to June 1994,
310 Keithwood Road Richard K. Mellon Professor of Finance since
Wynnewood, PA 19096 April 1984, and Dean's Advisory Council
Age 48 Member since July 1984, The Wharton School,
University of Pennsylvania; Associate
Editor, Journal of Banking and Finance since
June 1978; Associate Editor, Journal of
Economics and Business since October 1979;
Associate Editor, Journal of Money, Credit
and Banking since January 1980; Research
Associate, New York University Center for
Japan-U.S. Business and Economic Studies
since July 1989; Editorial Advisory Board,
Open Economics Review since November 1990;
Director, The Zweig Fund and The Zweig Total
Return Fund; Director or Trustee of The PNC
Fund, Temporary Investment Fund, Inc., Trust
for Federal Securities, Municipal Fund for
Temporary Investment, Municipal Fund for
California Investors, Inc. and Portfolios
for Diversified Investment.
</TABLE>
B-11
<PAGE> 38
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME, ADDRESS AND AGE POSITION WITH FUND PAST FIVE YEARS
--------------------- ------------------ ---------------
<S> <C> <C>
David R. Wilmerding, Jr.(2,3) Vice-Chairman of the President and Chief Executive Officer,
One Aldwyn Center Board Gates, Wilmerding, Carper & Rawlings, Inc.
Villanova, PA 19085 (successor to Wilmerding & Co., Inc.)
Age 59 (investment advisers) since February 1989;
Director, Beaver Management Corporation;
Director or Trustee of The PNC Fund,
Temporary Investment Fund, Inc., Trust for
Federal Securities, Municipal Fund for
Temporary Investment, Portfolios for
Diversified Investment and Independence
Square Income Securities, Inc.; Managing
General Partner, Chestnut Street Exchange
Fund.
Edward J. Roach Treasurer and Vice- Certified Public Accountant; Partner of the
400 Bellevue Parkway President accounting firm of Main Hurdman until 1981;
Suite 100 Vice Chairman of the Board, Fox Chase Cancer
Wilmington, DE 19809 Center; Trustee Emeritus, Pennsylvania
Age 70 School for the Deaf; Trustee Emeritus,
Immaculata College; Treasurer, Chestnut
Street Exchange Fund; President and
Treasurer, The RBB Fund, Inc.; Vice
President and Treasurer, Independence Square
Income Securities, Inc., Municipal Fund for
New York Investors, Inc., Municipal Fund for
California Investors, Inc., The PNC Fund,
Temporary Investment Fund, Inc., Municipal
Fund for Temporary Investment, Trust for
Federal Securities and Portfolios for
Diversified Investment.
W. Bruce McConnell, III Secretary Partner in the law firm of Drinker Biddle &
1100 Philadelphia National Reath, Philadelphia, Pennsylvania.
Bank Building
Broad and Chestnut Streets
Philadelphia, PA 19107
Age 52
</TABLE>
- ----------------------------
(1) This director may be deemed an "interested person", as defined in the
1940 Act, by reason of his affiliation with the Adviser or an
affiliate thereof.
(2) Executive Committee member.
(3) Audit Committee member.
(4) Nominating Committee member.
B-12
<PAGE> 39
The Company pays directors who are not affiliated with PNC Institutional
Management Corporation (the "Adviser"), Provident Distributors, Inc. (the
"Distributor") or their affiliates an annual retainer fee of $5,000 ($8,000 for
the Chairman). Directors who are not employed by the Adviser, the Distributor
or their affiliates are compensated $500 for reasonable expenses incurred in
attending meetings of the Board or certain committees thereof. Each director
has agreed to waive all such compensation payable to him until further notice.
No officer, director or employee of the Adviser, PNC Bank, National
Association, PFPC Inc., or the Distributor currently receives any direct
compensation from the Company. As of March 31, 1995, the directors and
officers of the Company, as a group, owned less than 1% of the outstanding
shares of each Fund.
During intervals between meetings of the Board of Directors,
the Executive Committee may exercise the authority of the Board in the
management of the Company's business to the extent permitted by law.
The table below sets forth estimated payments to the directors
from the "fund complex" (defined below) of which the Company is a part for the
fiscal year ended December 31, 1995.
B-13
<PAGE> 40
<TABLE>
<CAPTION>
Pension or
Retirement Estimated
Benefits Total Compensation
Aggregate Accrued as Part Estimated from Company and
Name of Person, Compensation(1) from of Fund Annual Benefits Fund Complex(2) Paid
Position Company Expenses Upon Retirement to Directors(3)
--------------- -------------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Director $0.00 $0.00 N/A (5)(4) $43,625.00
Robert R. Fortune, Director 0.00 0.00 N/A (7)(4) 59,625.00
Rodney D. Johnson, Director 0.00 0.00 N/A (7)(4) 54,375.00
G. Willing Pepper, Director and 0.00 0.00 N/A (8)(4) 97,875.00
Chairman
David R. Wilmerding, Jr., 0.00 0.00 N/A (7)(4) 60,625.00
Director
Anthony M. Santomero, Director 0.00 0.00 N/A (6)(4) 49,625.00
----- ----- -----------
$0.00 $0.00 $365,750.00
</TABLE>
- --------------------------------------
(1) Each director has agreed to waive all such compensation payable to him
by Provident Institutional Funds, Inc. until further notice.
(2) A "fund complex" means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment
adviser or have an investment adviser that is an affiliated
person of the investment adviser of any of the other
investment companies.
(3) The information furnished represents estimated payments for the year
ended December 31, 1995.
(4) Total number of such other investment companies director serves on
within the fund complex.
B-14
<PAGE> 41
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
The investment adviser for the Funds is PNC Institutional
Management Corporation (the "Adviser"). The Adviser acts as such pursuant to
a written agreement which is periodically approved by the directors or the
shareholders of the Funds. BlackRock Financial Management, Inc. (the
"Subadviser") currently serves as subadviser for each Fund, and is responsible
for the day-to-day management of each Fund's assets under an agreement between
the Adviser and the Subadviser. The Subadviser is an affiliate of the Adviser.
PNC Bank, National Association ("PNC Bank") serves as custodian for the Funds'
portfolio securities and cash, and PFPC Inc. serves as the Funds'
administrator.
Through February 16, 1995, Piper Trust Company (the "former
adviser") served as investment adviser to Piper Trust Funds Inc., the Company's
corporate predecessor by merger. Pursuant to an asset purchase agreement dated
December 29, 1994 between the former adviser and the Adviser (the "Purchase
Agreement"), the former adviser sold to the Adviser certain assets relating to
the operation of the Company and the Funds. As a condition to the Purchase
Agreement, the shareholders of each Fund, at a special meeting held on December
29, 1994 approved, among other things, a new investment advisory agreement
between the Company and the Adviser, and a new subadvisory agreement on behalf
of each of the Funds between the Adviser and the Subadviser.
CONTROL OF THE ADVISER AND THE SUBADVISER
The Adviser is a wholly-owned subsidiary of PNC Asset
Management Group, Inc., which is in turn a wholly-owned subsidiary of PNC Bank.
All of the capital stock of PNC Bank is owned by PNC Bancorp, Inc., which is in
turn a wholly-owned subsidiary of PNC Bank Corp., which is a publicly held bank
holding company. The Subadviser is a wholly-owned subsidiary of PNC Asset
Management Group, Inc., which is in turn a wholly-owned subsidiary of PNC Bank.
INVESTMENT ADVISORY AGREEMENT
The Adviser acts as the investment adviser of the Funds under
an Investment Advisory Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), other than as directors of
the Company) on November 9, 1994 and by shareholders of the Company on December
29, 1994.
The Investment Advisory Agreement will terminate automatically
in the event of its assignment. In addition, the agreement is terminable at
any time, without penalty, by the Board of Directors or by vote of a majority
of the Company's outstanding voting securities on not more than 60 days'
written notice to the Adviser, and by the Adviser on 60 days' written notice to
the Company. The Agreement may be terminated with respect to a particular Fund
at any time by a vote of the holders of a majority of the outstanding voting
securities of such Fund, upon 60 days' written notice to the Adviser.
B-15
<PAGE> 42
Unless sooner terminated, the Agreement shall continue in effect for more than
two years after its execution with respect to a particular Fund only so long as
such continuance is specifically approved at least annually by either the Board
of Directors or by a vote of a majority of the outstanding voting securities of
that Fund, provided that in either event such continuance is also approved by a
vote of a majority of the directors who are not parties to such Agreement, or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval. If a majority of the outstanding voting
securities of either Fund approves the Agreement, the Agreement shall continue
in effect with respect to such Fund whether or not the shareholders of the
other Fund approve the Agreement.
Under the Investment Advisory Agreement, the Adviser is
entitled to receive a monthly management fee computed separately for each Fund.
Such fee is payable at an annual rate of .40% of the average daily net assets
of each Fund. Until at least December 31, 1995, a portion of the advisory fee
will be waived, so that the advisory fee payable to the Adviser will be payable
at the annual rate of .30% of each Fund's average daily net assets. The
Investment Advisory Agreement became effective on February 17, 1995. Through
February 16, 1995, the Company's corporate predecessor (the "Predecessor
Company") was subject to a management fee at an annual rate of .60% of the
average daily net assets of each Fund pursuant to an investment advisory and
management agreement with the former adviser (the "Predecessor Agreement").
However, as a result of certain voluntary fee waivers and limitations by the
former adviser, the investment advisory and management fee paid by the
Predecessor Company to the former adviser for the fiscal year ended December
31, 1994 was paid at the effective annual rate of .19% of the Short Duration
Fund's average daily net assets, and .17% of the Intermediate Duration Fund's
average daily net assets. During the fiscal period ended December 31, 1994,
Short Duration Fund paid $185,195 (net of waivers) and Intermediate Duration
Fund paid $55,143 (net of waivers) to the former adviser under the Predecessor
Agreement.
Each Fund is subject to the laws of states in which the Fund's
shares are qualified for offer and sale, which may require that if a mutual
fund's expenses (including advisory fees but excluding interest, taxes,
brokerage commissions and extraordinary expenses) exceed certain percentages of
average net assets, the Fund must be reimbursed for such excess expenses. The
Investment Advisory Agreement provides that the Adviser must make any expense
reimbursements to the Funds required under state law. The most restrictive of
these laws that may apply to the Funds provides that aggregate annual expenses
of a mutual fund shall not normally exceed 2-1/2% of the first $30 million of
the average net assets, 2% of the next $70 million of the average net assets
and 1-1/2% of the remaining average net assets.
The same security may be suitable for both of the Funds and/or
for other funds or private accounts managed by the Adviser, the Subadviser or
their affiliates. If and when two or more funds or accounts simultaneously
purchase or sell the same security, the transactions will be allocated as to
price and amount in accordance with arrangements equitable to each fund or
account. The simultaneous purchase or sale of the same securities by both
Funds or by either of the Funds and other funds or accounts managed by the
Adviser, the Subadviser or their affiliates may have a detrimental effect on a
Fund, as this may affect
B-16
<PAGE> 43
the price paid or received by that Fund or the size of the position obtainable
or able to be sold by that Fund.
SUBADVISORY AGREEMENT
The Adviser has entered into a Subadvisory Agreement with the
Subadviser on behalf of each Fund. Under the Subadvisory Agreements, the
Subadviser is responsible for the day-to-day management of the respective
Funds. With respect to each Fund, the Adviser pays the Subadviser monthly
compensation payable over the same time periods and calculated in the same
manner as the investment advisory fee received by the Adviser from such Fund.
The fees payable by the Adviser to the Subadviser will equal, on an annual
basis, .25% of the average daily net assets of each Fund. The Subadviser will
waive its subadvisory fee and reimburse expenses to the extent of one-half of
any fee waivers or expense reimbursements undertaken by the Adviser.
Each Subadvisory Agreement will terminate automatically in the
event of its assignment. In addition, such Agreement is terminable at any
time, without penalty, by the Board of Directors on not more than 60 days'
written notice to the Adviser and the Subadviser or by a vote of the holders of
a majority of the outstanding shares of the applicable Fund. Unless sooner
terminated, each Subadvisory Agreement shall continue in effect until two years
from the date of its execution and thereafter from year to year provided that
it is specifically approved at least annually by either the Board of Directors
or by a vote of a majority of the outstanding voting securities of the
applicable Fund, provided that in either event such continuance is also
approved by a vote of a majority of the directors who are not parties to such
agreement, or interested persons of such parties, cast in person at a meeting
called for the purpose of voting on such approval.
Each Subadvisory Agreement was approved by the Company's
directors, including a majority of the directors who are not parties to such
contract or interested persons of such parties as defined in the 1940 Act, on
November 9, 1994, and by the shareholders of the applicable Fund on December
29, 1994.
Through February 16, 1995, Piper Capital Management
Incorporated (the "former subadviser"), an affiliate of the former adviser,
performed subadvisory services for both Funds, and PNC Bank performed
subadvisory services for Intermediate Duration Fund. During the fiscal year
ended December 31, 1994, the former adviser paid the former subadviser a fee at
the annual rate of .05% of the Short Duration Fund's average daily net assets
and .04% of the Intermediate Duration Fund's average daily net assets. The
former adviser also paid PNC Bank a fee at the effective annual rate of .01% of
the average daily net assets of Intermediate Duration Fund.
DISTRIBUTION AGREEMENT
Pursuant to the Distribution Agreement, the Distributor has
agreed to act as the principal underwriter for the Funds in the sale and
distribution to the public of shares of the Funds, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold. In addition, the Distributor may, out
B-17
<PAGE> 44
of its own assets, make payments to broker-dealers which have entered into
service agreements with the Distributor in connection with their sales of shares
of either Fund. The Distributor will not be compensated for its services under
the Distribution Agreement.
SERVICE PLAN
Under the terms of separate Shareholder Service Plans (each a
"Plan") adopted by the Company on behalf of each Fund pursuant to Rule 12b-1
under the 1940 Act ("Rule 12b-1"), the Distributor provides services to the
Company relating to the servicing of shareholder accounts or contracts with
financial institutions for the provision of such services. Such services
include, without limitation, responding to shareholder inquiries and providing
reports and other information. For such services, the Distributor is
compensated at the annual rate of .10% of the average daily net assets of each
Fund. Each Plan was approved by the Board of Directors, including a majority
of the Directors who are not interested persons of the Company and who have no
direct or indirect interest in the operation of either Plan or in any agreement
related to either Plan (the "Rule 12b-1 Directors") at a meeting called for the
purpose of voting on each Plan on November 9, 1994. The Plans were approved by
shareholders of each Fund on December 29, 1994.
The Plans had not taken effect prior to 1995 and, as a result,
neither Fund made any payments for such services during its last fiscal year.
Each Plan continues in effect from year to year provided that
such continuance is approved at least annually by vote of the Board of
Directors, including a majority of the Rule 12b-1 Directors, cast in person at
a meeting for the purpose of voting on such continuance. The Plans may each be
terminated at any time, without penalty, by the vote of a majority of the Rule
12b-1 Directors or by the vote of the holders of a majority of the outstanding
shares of the applicable Fund on not more than 60 days' written notice to any
other party to the Plans. Neither Plan may be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable Fund and all material amendments are
required to be approved by the Board of Directors in the manner described
above. Each Plan will automatically terminate in the event of its assignment.
The Company will not be contractually obligated to pay compensation under
either Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at
least quarterly a written report of the expenses incurred on behalf of each
Fund by the Distributor under each Plan. The report will include an
itemization of the expenses and the purposes of such expenditures. In
addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
B-18
<PAGE> 45
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with each of the
Funds, PFPC Inc., Bellevue Park Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809, telephone (800) 441-9800 ("PFPC"), performs various
administrative services for each Fund. These services include maintenance of
books and records, preparation of governmental filings and shareholder reports
and computation of net asset values and daily dividends. For its administrative
services, PFPC receives a fee from each Fund, payable monthly, equal on an
annual basis to .15% of such Fund's average daily net assets, plus any
out-of-pocket expenses. PFPC is an indirect wholly-owned subsidiary of PNC
Bank Corp., the parent company of the Adviser.
During the fiscal period ended December 31, 1994, under the
Administration Agreement Short Duration Fund paid $75,752 in administrative
fees and $76,254 in multi-manager fees (total $152,006), and Intermediate
Duration Fund paid $28,125 in administration fees and $21,253 in multi-manager
fees (total $49,378). Effective February 17, 1995, total fees under the
Administration Agreement are payable at the maximum annual rate of .15% of
each Fund's average daily net assets.
AUDITORS
KPMG Peat Marwick LLP, 1600 Market Street, Philadelphia,
Pennsylvania 19103, acts as the independent auditors for each Fund and in such
capacity examines each Fund's annual financial statements.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Because each Fund's portfolio is composed exclusively of debt,
rather than equity securities, most of a Fund's portfolio transactions are
effected without the payment of brokerage commissions, but at net prices which
usually include a markup. Most of a Fund's transactions are with the issuer,
or with major dealers acting for their own account and not as brokers.
Subject to the general supervision of the Board of Directors
of the Company, the Adviser and the Subadviser are responsible for effecting
securities transactions for each Fund. In placing orders for securities
transactions, the primary criterion for the selection of a broker-dealer is the
ability of the broker-dealer, in the opinion of the Adviser or the Subadviser,
as applicable, to secure prompt execution of the transactions at the most
favorable net price, considering the state of the market at the time.
Frequently the Adviser or the Subadviser selects a broker dealer to effect a
particular transaction without contacting all broker-dealers who might be able
to effect such transaction, because of the volatility of the market and the
desire to accept a particular price for a security.
When consistent with the objectives of prompt execution and
favorable net price, business may be placed with broker-dealers who furnish
investment research or services to the Adviser or the Subadviser. Such
research or services include advice, both directly and in writing, as to the
value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser or the Subadviser to supplement its own
investment research activities and enables the Adviser or
B-19
<PAGE> 46
the Subadviser to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for a Fund. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the Adviser or the Subadviser,
the Adviser or the Subadviser, as applicable, receives a benefit, not capable
of evaluation in dollar amounts, without providing any direct monetary benefit
to the Fund from these transactions. Research and statistical services
furnished by brokers through which a Fund effects securities transactions are
used by the Adviser or Subadviser in carrying out its investment management
responsibilities with respect to all its client accounts but not all such
services may be used by the Adviser or Subadviser in connection with the Fund.
Neither Fund will purchase at a higher price or sell at a lower price in
connection with transactions effected with a dealer, acting as principal, who
furnishes research services to such Fund than would be the case if no weight
were given by the Adviser or Subadviser to the dealer's furnishing of services.
In the event any transactions are executed on an agency basis,
the Adviser or the Subadviser will authorize a Fund to pay an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if the Adviser or the
Subadviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer to the Adviser or the Subadviser, viewed in
terms of either that particular transaction or the Adviser's or Subadviser's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion. If the Fund executes any transactions on an agency
basis, it will generally pay higher than the lowest commission rates available.
During the fiscal year ended December 31, 1994, the Funds paid
no brokerage commissions.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.001
per share, and have equal rights to share in dividends and assets. The shares
possess no preemptive or conversion rights. Cumulative voting is not
authorized. This means that the holders of more than 50% of the shares voting
for the election of directors can elect 100% of the directors if they choose to
do so, and in such event the holders of the remaining shares will be unable to
elect any directors.
As of December 31, 1994, PNC Bank, National Association, a
national banking association, "controlled" (within the meaning of the 1940 Act,
i.e., owned in excess of 25% of the shares of) Short Duration Fund and
Intermediate Duration Fund. PNC Bank, National Association is a wholly-owned
subsidiary of PNC Bancorp, Inc., which is in turn a wholly-owned subsidiary of
PNC Bank Corp., a publicly held bank holding company. An entity which
"controls" a particular Fund could have effective voting control over the
operations of that Fund.
The following chart identifies the numbers and percentages of
shares of the Funds owned by PNC Bank, National Association, and also
identifies those other shareholders holding of record or beneficially as of
March 31, 1995 5% or more of the shares of either Fund:
BENEFICIAL OWNER SHORT DURATION FUND INTERMEDIATE DURATION FUND
---------------- ------------------- --------------------------
PNC Bank, NA 8,000,000.00 shares 2,000,000.00 shares
One PNC Plaza 74.35% 51.78%
5th and Wood Street
Pittsburgh, PA 15265
First Midwest Bank 1,521,096.744 shares
Illinois NA 14.05%
c/o First Midwest
Bancorp
PO Box 3086
184 Shuman Blvd.
Naperville, IL 60566
Illini Bank 830,477.816 shares 213,016.108 shares
615 West Jefferson 7.71% 5.51%
Street
Springfield, IL 62702
NWA Federal Credit 1,536,557.807 shares
Union 39.78%
4 Apple Tree Square
Bloomington, MN 15265
B-20
<PAGE> 47
NUMBER PERCENT NUMBER PERCENT
------ ------- ------ -------
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund
shares is summarized in the Prospectus in the text following the headings
"Purchase of Shares--Public Offering Price" and "Valuation of Shares." The net
asset value of each Fund's shares is determined as of 4:00 p.m., New York City
time, on each Business Day, as defined in the Prospectus, provided that the net
asset value need not be determined on days on which changes in the value of the
Fund's portfolio securities will not materially affect the current net asset
value of the Fund's shares and days when no Fund shares are tendered for
redemption and no order for Fund shares is received.
On December 31, 1994, the net asset value per share of Short
Duration Fund was calculated as follows:
Net Assets ($101,904,245) = Net Asset Value per Share ($9.47)
----------------------------------
Shares Outstanding (10,756,869)
On December 31, 1994, the net asset value per share of
Intermediate Duration Fund was calculated as follows:
Net Assets ($35,389,944) = Net Asset Value per Share ($9.17)
---------------------------------
Shares Outstanding (3,860,091)
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for each Fund may
refer to "average annual total return" and "cumulative total return." Average
annual total return figures are computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and includes all recurring fees, such as
investment advisory fees, charged to all shareholder accounts.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
B-21
<PAGE> 48
CTR = (ERV-P)
-------
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus and includes all recurring fees, such as investment
advisory fees, charged to all shareholder accounts.
The aggregate total returns for the Short Duration and the
Intermediate Duration Funds for the period from commencement of operations
(February 14, 1994) through December 31, 1994 were (1.11)% and (3.64)%,
respectively.
Each Fund may also issue yield quotations. Yield is computed
by dividing the net investment income per share (as defined under Securities
and Exchange Commission rules and regulations) earned during the computation
period by the maximum offering price per share on the last day of the period
(based on a 30-day or one month period), according to the following formula:
6
YIELD = 2 [ (a-b +1) - 1]
---
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
When calculating the foregoing yield quotations, the
calculation of net change in account value will include the value of additional
shares purchased with dividends from the original share and dividends declared
on both the original share and any such additional shares, and all fees, other
than nonrecurring accounts or sales charges, that are charged to all
shareholder accounts in proportion to the length of the base period. Realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation are excluded from the calculation of yield and effective yield.
B-22
<PAGE> 49
Based upon the foregoing calculation, the standard yields of
the Short Duration and the Intermediate Duration Funds for the 30-day period
ended December 31, 1994 were 5.93% and 7.07%, respectively.
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when the New
York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Funds of securities
owned by them is not reasonably practicable, or it is not reasonably
practicable for the Funds fairly to determine the value of their net assets, or
(d) during any other period when the Securities and Exchange Commission, by
order, so permits, provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist.
TAXATION
Each Fund intends to continue to qualify and elect to be
treated each year as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated
investment company a Fund must satisfy the distribution requirement described
in the Prospectus, receive at least 90% of its gross income each year from
dividends, interest, gains from the sale or other disposition of securities and
certain other types of income, comply with certain diversification requirements
and derive less than 30% of its gross income from the sale or other disposition
of securities held less than three months. If for any taxable year a Fund does
not qualify as a regulated investment company, all of its taxable income will
be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
Fund's shareholders as ordinary dividends to the extent of the Fund's current
or accumulated earnings and profits.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and capital gain net income each calendar year to avoid liability for
this excise tax.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of the dividends or gross proceeds realized upon
the sale paid to any shareholder (i) who has provided either an incorrect
Social Security or Taxpayer Identification Number or no number at all, (ii) who
is subject to withholding by the Internal Revenue Service for failure to
properly include on his return payments of interest or dividends, or (iii) who
has failed to certify to the Company, when required to do so, that he is not
subject to backup withholding or is an "exempt recipient."
B-23
<PAGE> 50
Independent Auditors' Report
To the Shareholders and Trustees
Piper Trust Funds Inc.:
We have audited the statements of net assets of Piper Trust Funds Inc.
(comprising, respectively, the Short Duration Fund and Intermediate Duration
Fund) as of December 31, 1994, and the related statements of operations,
statements of changes in net assets, and the financial highlights, for the
period February 14, 1994 (commencement of operations) to December 31, 1994.
These financial statements and financial highlights are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation by
correspondence with the custodians of securities owned as of December 31, 1994.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds constituting Piper Trust Funds Inc. as of December 31,
1994, the results of their operations, the changes in their net assets, and the
financial highlights, for the period February 14, 1994 to December 31, 1994, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, PA
February 17, 1995
FS-1
<PAGE> 51
PIPER TRUST FUNDS INC.
SHORT DURATION FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Principal Value
Name of Issuer Amount (Note 2)
- -------------------------------------- --------- --------
(Percentages of each investment category relate to total net assets)
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (20.8%):
U.S. Treasury Notes:
7.25%, 08/31/96 . . . . . . . . . . . . . . . . $ 2,200,000 $ 2,188,868
6.50%, 04/30/99 . . . . . . . . . . . . . . . . 20,000,000 19,015,798
----------
Total U.S. Government Securities
(cost: $22,221,964) . . . . . . . . . . . . . . 21,204,666
----------
MORTGAGE-BACKED SECURITIES (28.7%):
GNMA (1.6%):
6.38%, ARM, 09/20/21 . . . . . . . . . . . . . . 853,361 830,427
6.37%, ARM, 08/20/22 . . . . . . . . . . . . . . 849,413 826,054
----------
1,656,481
-----------
FNMA (13.1%):
6.76%, ARM, 09/01/18 . . . . . . . . . . . . . . 3,021,613 3,066,937
7.64%, ARM, 11/01/18 . . . . . . . . . . . . . . 3,162,673 3,221,973
6.46%, ARM, 12/01/20 . . . . . . . . . . . . . . 2,161,711 2,142,796
6.15%, ARM, 12/01/21 . . . . . . . . . . . . . . 2,295,990 2,297,425
6.62%, ARM, 09/01/22 . . . . . . . . . . . . . . 2,531,456 2,571,011
-----------
13,300,142
-----------
FHLMC (14.0%):
6.89%, ARM, 10/01/19 . . . . . . . . . . . . . . 2,319,148 2,340,890
6.79%, ARM, 05/01/20 . . . . . . . . . . . . . . 2,763,730 2,815,550
6.55%, ARM, 08/01/20 . . . . . . . . . . . . . . 3,764,192 3,768,897
6.46%, ARM, 02/02/21 . . . . . . . . . . . . . . 2,822,896 2,821,131
4.10%, ARM, 01/01/24 . . . . . . . . . . . . . . 2,531,168 2,491,618
-----------
14,238,086
-----------
Total Mortgage-Backed Securities
(cost: $29,879,508) . . . . . . . . . . . . . . . . 29,194,709
-----------
</TABLE>
FS-2
<PAGE> 52
PIPER TRUST FUNDS INC.
SHORT DURATION FUND
STATEMENT OF NET ASSETS-CONTINUED
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Principal Value
Name of Issuer Amount (Note 2)
- -------------------------------------- -------- ----------
(Percentages of each investment category relate to total net assets)
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (31.4%):
FNMA (15.4%):
5.50%, Series 1993-71, Class PD, 12/25/03 . . . $ 2,000,000 $ 1,850,270
5.10%, Series 1994-50, Class PB, 04/25/10 . . . 2,000,000 1,845,880
5.50%, Series 1993-46, Class D, 01/25/13 . . . . 2,000,000 1,855,940
6.00%, Series 1994-31, Class AD, 03/25/15 . . . 1,863,791 1,718,733
5.50%, Series 1994-38, Class PD, 12/25/15 . . . 1,500,000 1,356,773
5.50%, Series 1993-156, Class A, 05/25/16 . . . 1,744,302 1,549,862
5.80%, Series X-225C, Class OE, 11/25/17 . . . . 2,000,000 1,784,989
5.85%, Series 1994-36, Class E, 03/25/18 . . . . 2,000,000 1,779,893
8.50%, Series 1991-11, Class Z, 10/25/20 . . . . 1,989,333 1,906,869
----------
15,649,209
----------
FHLMC (16.0%):
7.50%, Series 1295, Class G, 09/15/05 . . . . . 2,000,000 1,923,251
5.80%, Series 1697, Class PG, 04/15/06 . . . . 2,000,000 1,780,577
6.00%, Series 1708, Class A, 04/15/06 . . . . . 1,849,400 1,738,216
5.25%, Series 1706, Class C, 04/15/14 . . . . . 2,000,000 1,848,453
6.00%, Series 1360, Class PC, 06/15/16 . . . . 2,000,000 1,841,893
7.00%, Series 1593, Class A, 12/15/17 . . . . . 1,662,187 1,567,130
5.90%, Series 1694, Class PN, 03/15/19 . . . . 2,000,000 1,792,087
8.50%, Series 1141, Class F, 10/15/20 . . . . . 2,000,000 2,004,813
6.69%, Series 1611, Class G, 05/15/21 . . . . . 1,846,490 1,838,562
----------
16,334,982
----------
Total Collateralized Mortgage Obligations
(cost: $33,962,099) . . . . . . . . . . . . . . 31,984,191
----------
SHORT-TERM SECURITIES (18.8%):
Repurchase agreement with Goldman, Sachs & Co.,
5.80% acquired on 12/30/94 and due on 01/03/95
with accrued interest of $4,511 (collateralized
by U.S. government agency obligations) . . . . . . . 7,000,000 7,000,000
Repurchase agreement with Morgan Stanley & Co.,
5.50% acquired on 12/30/94 and due on 01/03/95
with accrued interest of $7,448 (collateralized by
U.S. government agency obligations) . . . . . . . . 12,188,000 12,188,000
----------
Total Short-Term Securities
(cost: $19,188,000) . . . . . . . . . . . . . . 19,188,000
----------
</TABLE>
FS-3
<PAGE> 53
PIPER TRUST FUNDS INC.
SHORT DURATION FUND
STATEMENT OF NET ASSETS-CONCLUDED
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Value
(Note 2)
-----------
<S> <C>
Total Investments in Securities (99.7%)
(cost: $105,251,571) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,571,566
Other Assets in Excess of Liabilities (0.3%) . . . . . . . . . . . . . . . . . . . . . . . 332,679
-----------
Net Assets (Note 6) (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,904,245
===========
(Equivalent to $9.47 per share based on 10,756,869 shares
of beneficial interest outstanding.)
Net asset value, offering price and
redemption value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.47
====
</TABLE>
At December 31, 1994, the cost of investments for federal income tax purposes
was $105,289,391. The gross and net unrealized depreciation of investments in
securities based on this cost was $3,717,825.
See accompanying Notes to Financial Statements.
FS-4
<PAGE> 54
PIPER TRUST FUNDS INC.
INTERMEDIATE DURATION FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Principal Value
Name of Issuer Amount (Note 2)
- --------------------------------------------- -------- --------
(Percentages of each investment category relate to total net assets)
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES (56.6%):
FNMA (3.1 %):
6.38%, 06/25/03 . . . . . . . . . . . . . . . . $ 725,000 $ 640,226
7.52%, 04/23/04 . . . . . . . . . . . . . . . . 500,000 470,655
----------
1,110,881
----------
FHLB (1.3%):
4.60%, 03/01/99 . . . . . . . . . . . . . . . . 500,000 458,675
----------
FHLMC (1.3%):
7.05%, 03/24/04 . . . . . . . . . . . . . . . . 500,000 456,865
----------
U.S. Treasury Notes (37.8%):
5.13%, 11/15/95 . . . . . . . . . . . . . . . . 500,000 491,670
7.50%, 02/29/96 . . . . . . . . . . . . . . . . 2,800,000 2,803,836
7.88%, 07/31/96 . . . . . . . . . . . . . . . . 500,000 502,250
6.50%, 11/30/96 . . . . . . . . . . . . . . . . 750,000 735,007
6.75%, 02/28/97 . . . . . . . . . . . . . . . . 1,000,000 980,760
7.38%, 11/15/97 . . . . . . . . . . . . . . . . 500,000 494,815
5.63%, 01/31/98 . . . . . . . . . . . . . . . . 500,000 470,320
5.38%, 05/31/98 . . . . . . . . . . . . . . . . 500,000 463,825
7.13%, 10/15/98 . . . . . . . . . . . . . . . . 200,000 195,998
6.50%, 04/30/99 . . . . . . . . . . . . . . . . 4,000,000 3,803,160
7.75%, 11/30/99 . . . . . . . . . . . . . . . . 250,000 249,170
6.38%, 08/15/02 . . . . . . . . . . . . . . . . 500,000 458,255
5.75%, 08/15/03 . . . . . . . . . . . . . . . . 2,000,000 1,740,340
----------
13,389,406
----------
U.S. Treasury Bonds (13.1 %):
7.25%, 08/15/22 . . . . . . . . . . . . . . . . 5,000,000 4,620,650
----------
Total U.S. Government and Agency Securities
(cost: $21,266,670) . . . . . . . . . . . . . . 20,036,477
----------
</TABLE>
FS-5
<PAGE> 55
PIPER TRUST FUNDS INC.
INTERMEDIATE DURATION FUND
STATEMENT OF NET ASSETS-CONTINUED
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Principal Value
Name of Issuer Amount (Note 2)
- --------------------------------------------- -------- --------
(Percentages of each investment category relate to total net assets)
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (25.5%):
GNMA (10.1%):
7.00%, 07/15/08 . . . . . . . . . . . . . . . . $924,382 $ 866,897
7.00%, 07/15/08 . . . . . . . . . . . . . . . . 922,943 865,547
7.00%, 01/15/24 . . . . . . . . . . . . . . . . 968,283 870,850
7.00%, 01/15/24 . . . . . . . . . . . . . . . . 970,445 872,794
7.00%, 02/15/24 . . . . . . . . . . . . . . . . 81,760 73,533
----------
3,549,621
----------
FNMA (10.5%):
6.50%, 03/01/09 . . . . . . . . . . . . . . . . 974,823 893,791
7.00%, 08/01/22 . . . . . . . . . . . . . . . . 1,010,816 919,526
7.00%, 03/01/24 . . . . . . . . . . . . . . . . 998,440 908,268
11.00%, 08/01/24 . . . . . . . . . . . . . . . . 918,254 993,723
----------
3,715,308
----------
FHLMC (4.9%):
6.00%, 01/01/09 . . . . . . . . . . . . . . . . 980,362 882,326
6.50%, 02/01/24 . . . . . . . . . . . . . . . . 974,287 861,330
----------
1,743,656
----------
Total Mortgage-Backed Securities
(cost: $9,874,062) . . . . . . . . . . . . . . . . . 9,008,585
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.6%):
FNMA (3.6%)
8.50%, Series 1991-11, Class Z 10/25/20 . . . . 1,326,222 1,271,246
----------
Total Collateralized Mortgage Obligations
(cost: $1,345,217) . . . . . . . . . . . . . . . 1,271,246
----------
SHORT-TERM SECURITIES (13.5%):
FHLB
5.60%, 01/03/95 . . . . . . . . . . . . . . . . 1,115,000 1,114,653
Repurchase agreement with Morgan Stanley,
5.50% acquired on 12/30/94 and due on
01/03/95 with accrued interest of
$2,247 (collateralized by U.S. government
agency obligations) . . . . . . . . . . . . . . . . 3,677,000 3,677,000
----------
Total Short-Term Securities
(cost: $4,791,653) 4,791,653
-----------
</TABLE>
FS-6
<PAGE> 56
PIPER TRUST FUNDS INC.
INTERMEDIATE DURATION FUND
STATEMENT OF NET ASSETS-CONCLUDED
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Value
(Note 2)
-----------
<S> <C>
Total Investments in Securities (99.2%)
(cost: $37,277,602) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,107,961
Other Assets in Excess Of Liabilities (0.8%) . . . . . . . . . . . . . . . . . . . . . . . 281,983
----------
Net Assets (Note 6) (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,389,944
==========
(Equivalent to $9.17 per share based on 3,860,091 shares
of beneficial interest outstanding.)
Net asset value, offering price and
redemption value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.17
====
</TABLE>
At December 31, 1994, the cost of investments for federal income tax purposes
was $37,328,170. The gross and net unrealized depreciation of investments in
securities based on this cost was $2,220,209.
See accompanying Notes to Financial Statements.
FS-7
<PAGE> 57
PIPER TRUST FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1994 (1)
<TABLE>
<CAPTION>
Short Intermediate
Duration Duration
Fund Fund
---------- ------------
<S> <C> <C>
INCOME:
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,240,825 $ 1,918,501
Fee Income (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . 119,937 71,890
---------- ----------
Total investment income . . . . . . . . . . . . . . . . . . . . . 5,360,762 1,990,391
---------- ----------
EXPENSES (Note 5):
Investment advisory fee . . . . . . . . . . . . . . . . . . . . . . . 588,695 191,701
Administration, transfer agent and custodian fees . . . . . . . . . . 297,899 152,011
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . 38,008 14,085
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . 1,000 500
Amortization of organization costs . . . . . . . . . . . . . . . . . . 9,078 9,078
Directors' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,100 7,100
Audit and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . 41,436 13,040
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,974 6,324
---------- -----------
1,008,190 393,839
Less expenses waived . . . . . . . . . . . . . . . . . . . . . . . . . (516,668) (218,114)
---------- -----------
Total expenses - net . . . . . . . . . . . . . . . . . . . . . . . 491,522 175,725
---------- ----------
Investment income - net . . . . . . . . . . . . . . . . . . . . . . . 4,869,240 1,814,666
---------- -----------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS:
Net realized loss on investments (Note 3) . . . . . . . . . . . . . . (2,043,665) (681,420)
Net change in unrealized depreciation
on investments . . . . . . . . . . . . . . . . . . . . . . . . . . (3,680,005) (2,169,641)
--------- ---------
Net loss on investments . . . . . . . . . . . . . . . . . . . . . . . (5,723,670) (2,851,061)
--------- ---------
Net decrease in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (854,430) $ (1,036,395)
========== ===========
</TABLE>
(1) Commencement of operations was February 14, 1994.
See accompanying Notes to Financial Statements.
FS-8
<PAGE> 58
PIPER TRUST FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1994 (1)
<TABLE>
<CAPTION>
Short Intermediate
Duration Duration
Fund Fund
---------- ------------
<S> <C> <C>
OPERATIONS:
Investment income - net . . . . . . . . . . . . . . . . . . . . . . . $ 4,869,240 $1,814,666
Net realized loss on investments . . . . . . . . . . . . . . . . . . . (2,043,665) (681,420)
Net change in unrealized
depreciation of investments . . . . . . . . . . . . . . . . . . . (3,680,005) (2,169,641)
----------- -----------
Net decrease in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . . . . (854,430) (1,036,395)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment income - net . . . . . . . . . . . . . . . . . . . . . . . (4,869,240) (1,814,666)
----------- ----------
CAPITAL SHARE TRANSACTIONS (Note 4):
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . 144,554,622 43,000,000
Shares issued for reinvestment of
distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 251,578 245,627
Payments for shares redeemed . . . . . . . . . . . . . . . . . . . . . (37,228,285) (5,054,622)
------------ -----------
Increase in net assets from capital
share transactions . . . . . . . . . . . . . . . . . . . . . . . 107,577,915 38,191,005
----------- ----------
Total increase in net assets . . . . . . . . . . . . . . . . . . . 101,854,245 35,339,944
Net assets at beginning of period (Note 1) . . . . . . . . . . . . . . . . 50,000 50,000
----------- ----------
Net assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . $101,904,245 $35,389,944
=========== ==========
</TABLE>
(1) Commencement of operations was February 14, 1994.
See accompanying Notes to Financial Statements.
FS-9
<PAGE> 59
PIPER TRUST FUNDS INC.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED
DECEMBER 31, 1994 (1)
<TABLE>
<CAPTION>
Short Intermediate
Duration Duration
Fund Fund
---------- ------------
<S> <C> <C>
Per Share Data
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . $10.00 $10.00
----- -----
Operations:
Investment income - net . . . . . . . . . . . . . . . . . . . . . . . .42 .46
Net realized and unrealized losses
on investments . . . . . . . . . . . . . . . . . . . . . . . . . . (.53) (.83)
----- -----
Total from operations . . . . . . . . . . . . . . . . . . . . . . (.11) (.37)
----- -----
Distributions to shareholders:
From investment income - net . . . . . . . . . . . . . . . . . . . . . (.42) (.46)
----- -----
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . $ 9.47 $ 9.17
===== =====
Total return (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.11)% (3.64)%
Ratios/Supplemental Data
Net assets at end of period $(000) . . . . . . . . . . . . . . . . . . 101,904 35,390
Ratio of total expenses to average net assets (3)(4) . . . . . . . . . .50% .55%
Ratio of net investment income to
average net assets (3) . . . . . . . . . . . . . . . . . . . . . . 4.96% 5.68%
Portfolio turnover rate
(excluding short-term securities) . . . . . . . . . . . . . . . . 90.6% 50.5%
</TABLE>
(1) Commencement of operations was February 14, 1994.
(2) Based on the change in net asset value of a common share during the period.
Assumes reinvestment of distributions at net asset value.
(3) Adjusted to an annual basis.
(4) Without the voluntary waiver of expenses, the annualized ratios of expenses
to average net assets would have been 1.03% and 1.23% for Short Duration
and Intermediate Duration, respectively, for the period ended December 31,
1994.
See accompanying Notes to Financial Statements.
FS-10
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS
(1) Organization Piper Trust Funds Inc. (the company), an
open-end management investment company, was
incorporated on October 7, 1993 and is
registered under the Investment Company Act
of 1940 (as amended) and currently includes
two diversified series: Short Duration Fund
and Intermediate Duration Fund (the funds).
The Company commenced operations on February
14, 1994, when its shares were first offered
to the public. The only transaction prior
to that date was the initial sale of 5,000
shares of each series to the adviser.
(2) Significant
Accounting INVESTMENTS IN SECURITIES
Policies Fixed income securities are valued at market
values as determined by pricing services.
When market values are not readily available,
securities are valued at fair value as
determined in good faith by the board of
directors. Short-term securities with
maturities of less than sixty
days are valued at amortized cost which
approximates market value.
Security transactions are accounted for on
the date the securities are purchased or
sold. Realized gains and losses are
calculated on the identified cost basis.
Interest income, including amortization of
bond discount and premium computed on a level
yield basis, is accrued daily.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the funds on a forward
commitment or when-issued basis can take
place a month or more after the transaction
date. During this period, such securities do
not earn interest, are subject to market
fluctuations, and may increase or decrease in
value prior to their delivery. The funds
maintain in a segregated account with their
custodian, securities with a market value
equal to the amount of their purchase
commitments. The purchase of securities on a
when-issued or forward commitment basis may
increase the volatility of the funds' net
asset value to the extent the funds make such
purchases while remaining substantially fully
invested. As of December 31, 1994, Short
Duration Fund and Intermediate Duration Fund
had no outstanding when-issued or forward
commitments.
In connection with its ability to purchase
securities on a when-issued or forward
commitment basis, each fund may enter into
mortgage "dollar rolls" in which the fund
sells securities for delivery in the current
month and simultaneously contracts with the
same counterparty to repurchase similar (same
type, coupon and maturity) but not identical
securities on a specified future date. As an
inducement to "roll over" its purchase
commitments, the fund receives negotiated
fees. For the period ended December 31,
1994, such fees earned by Short Duration Fund
and Intermediate Duration Fund amounted to
$119,937 and $71,890, respectively.
FEDERAL TAXES
Each fund within the company is treated as a
separate entity for federal income tax
purposes. Each fund's policy is to comply
with the requirements of the Internal Revenue
Code applicable to regulated investment
companies and to distribute all of its
taxable income to shareholders; therefore, no
income tax provision is required. In
addition, on a calendar-year basis, each fund
intends to distribute
FS-11
<PAGE> 61
substantially all of its net investment
income and realized gains, if any, and will,
therefore, not be subject to federal excise
taxes.
Net realized gains (losses) may differ for
financial statement and tax purposes
primarily due to the recognition of losses
deferred due to "wash sale" transactions.
The character of distributions made during
the year from net realized gains, if any, may
also differ from their ultimate
characterization for federal income tax
purposes. In addition, due to the timing of
dividend distributions, the fiscal year in
which amounts are distributed may differ from
the year that the realized gains (losses)
were recorded by the fund.
For federal income tax purposes, the funds
had capital loss carryovers of $2,005,845 for
the Short Duration Fund and $630,852 for the
Intermediate Duration Fund on December 31,
1994, which, if not offset by subsequent
capital gains, will expire in 2002. It is
unlikely the board of directors will
authorize a distribution of any net realized
capital gains until the available capital
loss carryovers have been offset or expire.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net
investment income are declared daily and paid
monthly in cash or reinvested in additional
shares. Distributions from net realized
capital gains, if any, will be made on an
annual basis.
ORGANIZATION COSTS
Organization costs were incurred in
connection with the start-up and initial
registration of the funds. These costs are
being amortized over 60 months on a
straight-line basis. If any or all of the
shares representing initial capital of each
fund are redeemed by any holder thereof prior
to the end of the amortization period, the
proceeds will be reduced by the unamortized
organization cost balance in the same
proportion as the number of shares redeemed
bears to the number of initial shares
outstanding immediately preceding the
redemption.
REPURCHASE AGREEMENTS
During the period ended December 31, 1994,
the funds have invested in repurchase
agreements. In accordance with the funds'
investment objectives and policies, the funds
may purchase money market instruments from
financial institutions, such as banks and
non-bank dealers, subject to the seller's
agreement to repurchase them at an agreed
upon date and price. The seller will be
required on a daily basis to maintain the
value of the collateral subject to the
agreement at not less than the repurchase
price (including accrued interest). The
agreements are conditioned upon the
collateral being deposited under the Federal
Reserve book-entry system or with the funds'
custodian or a third party sub-custodian. If
the seller defaults and the value of the
collateral declines or if bankruptcy
proceedings are commenced with respect to the
seller of the security, realization of the
collateral by the funds may be delayed or
limited.
FS-12
<PAGE> 62
(3) Investment Cost of purchases and proceeds from sales
Security of securities, other than temporary
Transactions investments in short-term securities, for
the period ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
Short Duration Intermediate Duration
Fund Fund
---- ----
<S> <C> <C>
Purchases . . . . . . . . . . . . . . . . . . . . . . . . $174,033,718 $47,601,611
Sales Proceeds . . . . . . . . . . . . . . . . . . . . . $ 80,597,748 $14,341,719
</TABLE>
(4) Transactions in shares of each fund for the period ended December 31,
1994 were as follows:
<TABLE>
<CAPTION>
Short Intermediate
Duration Duration
Fund Fund
---- ----
<S> <C> <C> <C>
Capital Share Sold . . . . . . . . . . . . . . . . . . . . . . . 14,569,758 4,364,584
Transactions Issued for reinvested distributions . . . . . . . . 25,952 25,954
Redeemed . . . . . . . . . . . . . . . . . . . . . (3,843,841) (535,447)
---------- ---------
Increase . . . . . . . . . . . . . . . . . . . . 10,751,869 3,855,091
========== =========
</TABLE>
(5) Fees and Piper Trust Company (the "Adviser") was
Expenses retained under an Investment Advisory and
Management Agreement with the Company to act
as the investment adviser and distributor
for each of the funds. Under the Investment
Advisory and Management Agreement, the
Adviser received a monthly management fee
computed separately for each fund. Such
fees were payable at an annual rate of .60%
of the average daily net assets of each fund.
The Adviser waived payment of its management
fee for the first six months of the funds'
operations and thereafter voluntarily limited
its fee to .45% of each fund's average daily
net assets. For the period ended December
31, 1994, the Adviser voluntarily waived
fees of $403,500 for the Short Duration and
$136,558 for the Intermediate Duration Fund.
This voluntary limitation may be terminated
at any time after the funds' December 31,
1994 fiscal year end, at the Adviser's
discretion.
The Adviser selected Piper Capital Management
Incorporated ("Piper Capital") to act as
money manager for both of the funds and PNC
Bank, National Association ("PNC") to act as
a money manager for the Intermediate Duration
Fund. The Adviser entered into Sub-Advisory
Agreements with each of the money managers.
With respect to each fund, the Adviser paid
each money manager monthly compensation
payable over the same time periods and
calculated in the same manner as the
investment advisory fee received by the
Adviser from such fund. The fees paid by the
Adviser to each money manager equalled, on an
annual basis, .16% of that portion of the
average daily net assets of each fund under
management by such money manager. Each money
manager agreed to limit or waive its fee to
the same extent as the Adviser.
PFPC Inc., a subsidiary of PNC, serves as the
funds' administrator and transfer agent. PNC
serves as the funds' custodian. For the
period ended December 31, 1994, PFPC Inc. and
PNC have voluntarily waived fees of $113,168
for the Short Duration Fund and $81,556 for
the Intermediate Duration Fund for these
services.
FS-13
<PAGE> 63
(6) Net Assets At December 31, 1994, net assets for each
fund consisted of the following:
<TABLE>
<CAPTION>
Short Duration Intermediate Duration
Fund Fund
---- ----
<S> <C> <C>
Capital stock $107,627,915 $38,241,005
Undistributed net investment income -- --
Accumulated loss on investments (2,043,665) (681,420)
Unrealized depreciation of
investments (3,680,005) (2,169,641)
----------- -----------
Net assets $101,904,245 $ 35,389,944
============ ============
</TABLE>
(7) Subsequent Effective February 17, 1995, the Company
Event merged into a newly formed Maryland
corporation, Provident Institutional Funds,
Inc. Effective on that date, PNC
Institutional Management Corporation
("PIMC"), a wholly-owned subsidiary of PNC
became the Funds' investment adviser and
BlackRock Financial Management L.P.
("BlackRock") became the subadviser. In
connection with its services rendered to the
Funds, PIMC will receive a monthly management
fee payable at an initial rate of .40% of
the average daily net assets of each Fund.
Under the terms of the subadvisory agreement
no fees are paid by the Funds to the
subadviser; however, BlackRock will receive
monthly compensation from PIMC equal, on an
annual basis, to .25% of the average daily
net assets of each Fund. Provident
Distributors, Inc. became the Funds'
distributor and will receive fees computed
separately for each Fund. The Funds have
adopted a shareholder service plan (the
"Service Plan"), pursuant to Rule 12b-1 of
the Investment Company Act of 1940.
The Plan of Merger and new advisory and
subadvisory agreements were approved by the
Board of Directors at a meeting held on
November 9, 1994, and by the shareholders
of the Funds at a meeting held on December
29, 1994. The distribution agreement was
approved by the Board of Directors at the
meeting held on November 9, 1994, and the
Service Plan was approved by the shareholders
of the Funds at the meeting held on December
29, 1994.
FS-14
